Home / News / Major bank’ first-half profits jump, but sector now ‘walking a tightrope’

Higher net interest margins helped drive a nearly 17 per cent increase in the banks' combined cash profits from a year ago. But a 400 per cent increase in their interest expenses and stiffer lending competition are contributing to a weaker outlook going forward, analysts say.

The big four banks have recorded another strong half-year, posting nearly $17 billion in combined profit thanks largely to higher net interest margins as the Reserve Bank of Australia raises rates. But cracks are starting to show, with analysts pointing to higher interest costs, earnings pressure and stress in banks’ loan portfolios as signs the winning streak is nearing its end.

The combined cash profit figure is up 16.6 per cent from 2022’s first-half results, according to KPMG, which said the RBA’s tightening of monetary policy drove a 14 basis-point increase in net interest margins. As a result, the banks’ net interest income rose to $37.7 billion for the half, up 17 per cent from a year ago.

While the results show the banks’ margins have “returned to levels not seen since 2019”, KPMG said, “margins are under pressure from both intense pricing competition in the home loan market and a significant increase in interest expense to $46.1 billion, up from $8.7 billion in 1H22 and $14.3 billion in 2H22, driven by the rising costs of deposits and wholesale funding”.

Westpac reported a statutory net profit of $4 billion, up 22 per cent from a year ago. National Australia Bank (NAB) also reported a $4 billion net profit, as well as cash earnings of $4.1 billion, up 17 per cent from the first half of 2022, with underlying profit growth of 25.5 per cent.

ANZ announced a $3.8 billion for the first half, up 12 per cent from a year ago, with statutory profit of $3.5 billion. And Commonwealth Bank of Australia (CBA), which released a trading update for the quarter ending March 31, reported an unaudited profit of $2.6 billion, while it said it expects growth to continue to moderate.

“In this reporting period, we see the majors have grown both the volume and profitability of their loan books,” KPMG Australia head of banking and capital markets Steve Jackson said. “However, this is now being offset to a degree by the more than 400 per cent increase in interest expense compared with 12 months ago.”

According to analysis from EY, the banks reported nearly 16.8 billion in combined statutory earnings, up 10.8 per cent from the 2022 first-half results, and their return on equity increased by an average of 190 basis points, to 12.6 per cent. However, credit impairment charges also increased, by nearly $1.7 billion, with net write-backs increasing from $220 million in H12022 to $1.44 billion this period.

“Australia’s major banks are walking a tightrope as headwinds for the sector intensify,” said Doug Nixon (pictured), EY Oceania banking and capital markets leader.

“The resilience of the Australian economy continued to support credit growth and quality throughout the first half of the year,” he added. “However, intense competition in response to retail credit growth compression, coupled with rising funding costs, amplified by the recent dislocation in financial markets, will likely erode the benefits the banks have gained from the higher interest rate environment.”

In addition to the slowing momentum in lending markets, he cited asset quality deterioration as a risk, as well as increasing operating costs around staff, technology, cybersecurity and remediation.

“So, while Australia’s major banks remain strong and resilient, pressure on net interest margins, combined with the increasingly uncertain operating environment, means they face a complex high-wire balancing act when it comes to managing profitable growth, customer expectations, investment priorities and shareholder returns.”