Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Bank profits under pressure from customer-centric fintechs
With the National Australia Bank (ASX:NAB) delivering its results this week, it rounded out what has been a remarkable recovery for the Australian banking sector. Global consulting firm Ernst & Young (EY) this week released its annual update and analysis of what is one of the most important sectors of the domestic economy.
It was a tale of two halves, and likely two years, for the sector, which has continued to move past missteps in wealth management towards ‘simplified’ and more customer-centric businesses. According to EY’s analysis, banks’ cash earnings were up 55 per cent, or $9 billion, for the 12 months to September, to $26.8 billion, with the tailwind of impairment reversals a key contributor; this number fell 107 per cent from the heights of the pandemic.
Commenting on the latter, EY region banking and capital markets lead Tim Dring notes that while the deferral trend is a positive, management “will need to keep a close eye on this in coming months, with the recent lockdowns in Victoria and New South Wales likely to have put increased pressure on borrowers who were already facing repayment difficulty”.
As has been the case for the last decade, residential mortgage lending remains the core driver of revenue and profits, with the system having doubled its pace in the last 12 months, with net new loan growth hitting 6.5 per cent. Similarly, more borrowers are choosing to refinance, and benefit from lower interest rates or cashback opportunities, with consistent growth in five consecutive months to August 2021.
Despite the strong backdrop and incredible strength in the residential property sector, EY expects revenue and profitability to remain under pressure due to the multiple threats of higher funding costs, greater competition and the need for further technology investment. 2021 has already seen the final drawdown of the Term Funding Facility (TFF) that was offered by the Reserve Bank of Australia to ensure the lending gates remained open; the result has been that “fixed interest rates are on the rise as banks look to sustain margins.”
According to Dring, the Big Four banks’ “immediate priorities include the continuation of their simplification and digitisation strategies to boost efficiency and improving customer experience in the face of increasing competition from fintech and bigtech disruptors.” The risk from the latter is particularly acute and present with fintech players “targeting new revenue streams and customer acquisition, challenging traditional banking.”
That said, the opportunity is there for those banks willing to embrace the challenge and able to keep up with surging demand, as evidenced by the Commonwealth Bank’s recent investment in becoming an artificial intelligence and automation leader. In fact, it may well be the only way to sustain the improving return on equity, which added close to 50 per cent and is once again nearing double figures.
What is clear about this banking system is that the lazy days of the past are gone, with tomorrow’s leaders those willing to embrace technology and deliver truly customer-focused experiences.
