Welcome to the Fear and Greed Business Interview. I'm Suan Alma. The big banks this year reported total cash earnings of almost thirty one billion dollars. While that's down more than five percent from last year's record high, it remains one of the sector's best results in years. The banks are obviously a key contributor to the strength of the local share market, so I wanted to take a closer look at the results as well as what we can expect from the majors in the near future. Sam Garland is the Banking and Capital Markets leader at PwC Australia. Sam, Welcome to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Suan Alma. The big banks this year reported total cash earnings of almost thirty one billion dollars. While that's down more than five percent from last year's record high, it remains one of the sector's best results in years. The banks are obviously a key contributor to the strength of the local share market, so I wanted to take a closer look at the results as well as what we can expect from the majors in the near future. Sam Garland is the Banking and Capital Markets leader at PwC Australia. Sam, Welcome to Fear and Greed.

Thanks Sean.

Thanks Sean.

Hello, you've looked at the health of the big four banks. Where do you put them? How healthy are they?

Hello, you've looked at the health of the big four banks. Where do you put them? How healthy are they?

Yeah, that's right, Like you said, they've just ruled off FY twenty four and nearly thirty one billion dollars in cash profit. That's down about five percent. As you said, it's nearly a record. Last year was a record. But it's interesting because you know that the benefit of the margin had a tailwind that they had coming into that year has faded pretty quickly and so you know, our big theme here was that the result was squeezed by competition and costs in particular. So while it's a great result and comparable to many banks around the world, really great results, it does reveal the reality of Australian banking today.

Yeah, that's right, Like you said, they've just ruled off FY twenty four and nearly thirty one billion dollars in cash profit. That's down about five percent. As you said, it's nearly a record. Last year was a record. But it's interesting because you know that the benefit of the margin had a tailwind that they had coming into that year has faded pretty quickly and so you know, our big theme here was that the result was squeezed by competition and costs in particular. So while it's a great result and comparable to many banks around the world, really great results, it does reveal the reality of Australian banking today.

Okay, so let's go through cost revenue and then net interest margin in that order. What's happening with costs obviously on the rise any particular I know some specific banks might talk about it. Costs was a big one for one of the banks. So generally, you know, where are the costs coming in?

Okay, so let's go through cost revenue and then net interest margin in that order. What's happening with costs obviously on the rise any particular I know some specific banks might talk about it. Costs was a big one for one of the banks. So generally, you know, where are the costs coming in?

Yeah, yeah, you're right. So I mean total costs were actually a record and when you take out some of the lumpy stuff, forty three point two billion dollars across the four The big drivers of growth six and a half percent growth for the year were technology costs. As you said, you know, items like property and personnel generally have been pretty well managed and tightly managed. But the compound growth rate of technology costs is well over six percent at the moment. And what the puts the banks in a position is that the cost to income ratio, and we'll talk about income in a moment is as high as it has been for you know, over fifteen years in the sector, and so, you know, to put that into context, I remember, you know, ten years or so, there was a talk of a forty percent cost to income ratio for banks being in within reach. To get to that, today the majors would have to shed over twelve percent of costs or you know, over seven billion dollars of costs to get to that.

Yeah, yeah, you're right. So I mean total costs were actually a record and when you take out some of the lumpy stuff, forty three point two billion dollars across the four The big drivers of growth six and a half percent growth for the year were technology costs. As you said, you know, items like property and personnel generally have been pretty well managed and tightly managed. But the compound growth rate of technology costs is well over six percent at the moment. And what the puts the banks in a position is that the cost to income ratio, and we'll talk about income in a moment is as high as it has been for you know, over fifteen years in the sector, and so, you know, to put that into context, I remember, you know, ten years or so, there was a talk of a forty percent cost to income ratio for banks being in within reach. To get to that, today the majors would have to shed over twelve percent of costs or you know, over seven billion dollars of costs to get to that.

Is this a fact? Why are the technology costs so high? I mean, technology costs are always high, But are the banks being particularly hit because of legacy issues or is it just AI? I mean, what's the reason that technology costs as sell high?

Is this a fact? Why are the technology costs so high? I mean, technology costs are always high, But are the banks being particularly hit because of legacy issues or is it just AI? I mean, what's the reason that technology costs as sell high?

Now, yeah, I think it's more about the dealing with legacy and modernizing I suppose would be the summary of that. There's a huge amount of investment happening across the majors and banks around the world to bring systems up to kind of modern standards, and also you know, dealing with cyber you know, the risk side of technology as well. So you know, I generally say it's about investment to optimize and modernize the business more so than it probably is yet about the more futuristic stuff like like AI and that sort.

Now, yeah, I think it's more about the dealing with legacy and modernizing I suppose would be the summary of that. There's a huge amount of investment happening across the majors and banks around the world to bring systems up to kind of modern standards, and also you know, dealing with cyber you know, the risk side of technology as well. So you know, I generally say it's about investment to optimize and modernize the business more so than it probably is yet about the more futuristic stuff like like AI and that sort.

So, so in a sense, I suppose what I'm getting to with that is it's almost table stakes money as opposed to investing for growth.

So, so in a sense, I suppose what I'm getting to with that is it's almost table stakes money as opposed to investing for growth.

Well, I mean these are big programs of work for sure, so they are transformative in terms of what they're trying to achieve. But yeah, I think it's you know, it's probably more about modernizing. Certainly. I think banks would argue that the consequence of doing that is it creates more flexibility for the future to do more interesting things. But we're not talking kind of big, big investments into generative AI at this point. I think we all see that coming. But at this point, okay, let's go to the income side. Then where's revenue coming from? Where's the growth? Yeah, So, as I said, you know, the result overall was down year and year and actually at the net interest income level. So if you like the kind of the deposits and lending side all rolled up it owns he just rose. And the reason for that is margins, which we might get to in more detail, you know, continued to compress, and lending growth was actually okay, it was slower than that the prior half. It grew at about three and a half percent for the major banks, but mortgage growth was down and they losing share in mortgages, while business credit growth is actually really strong, as it has been for the last few years, so that the income side really for the majors these days is very much about balance cheap less so about other fee income. And that's the point that we talk about quite a lot, is that Australian banks, like many around the world, are now very simple focused onto a core product set. They're no longer earning. You know, thirty percent of income if you go back ten fifteen years came from non interest income. Today it's about seventeen percent. It's a very concentrated pool of earnings for the banks.

Well, I mean these are big programs of work for sure, so they are transformative in terms of what they're trying to achieve. But yeah, I think it's you know, it's probably more about modernizing. Certainly. I think banks would argue that the consequence of doing that is it creates more flexibility for the future to do more interesting things. But we're not talking kind of big, big investments into generative AI at this point. I think we all see that coming. But at this point, okay, let's go to the income side. Then where's revenue coming from? Where's the growth? Yeah, So, as I said, you know, the result overall was down year and year and actually at the net interest income level. So if you like the kind of the deposits and lending side all rolled up it owns he just rose. And the reason for that is margins, which we might get to in more detail, you know, continued to compress, and lending growth was actually okay, it was slower than that the prior half. It grew at about three and a half percent for the major banks, but mortgage growth was down and they losing share in mortgages, while business credit growth is actually really strong, as it has been for the last few years, so that the income side really for the majors these days is very much about balance cheap less so about other fee income. And that's the point that we talk about quite a lot, is that Australian banks, like many around the world, are now very simple focused onto a core product set. They're no longer earning. You know, thirty percent of income if you go back ten fifteen years came from non interest income. Today it's about seventeen percent. It's a very concentrated pool of earnings for the banks.

Say with me, Sam, we'll be back in a minute. I'm speaking to Sam Garland, Banking and Capital Markets leader at PwC Australia. Okay, so we'll when we go to mortgages, is that because of competition. I know that there was a period there where Commonwealth Bank, which is a market leader in mortgages, didn't chase market chair. I think they're probably back doing that now. Without commenting specifically on any bank, is it about the competition the mortgage market, which is where they've been hurt.

Say with me, Sam, we'll be back in a minute. I'm speaking to Sam Garland, Banking and Capital Markets leader at PwC Australia. Okay, so we'll when we go to mortgages, is that because of competition. I know that there was a period there where Commonwealth Bank, which is a market leader in mortgages, didn't chase market chair. I think they're probably back doing that now. Without commenting specifically on any bank, is it about the competition the mortgage market, which is where they've been hurt.

Yeah, I mean the margin side of that is very much a competition story and so very happy to get into the detail. On the margin side, I think there's also an element there of mortgage credit growth has just been a bit slower over the last two years or so, but competition has really been the big driver of the income pressure in mortgages. But also, you know, there's more people after mortgages. You know, we've got disruptions from other banks playing into that a little bit on the tech side, but more from other banks who are choosing to deploy capital into mortgages and have been doing that very successfully over the last few years.

Yeah, I mean the margin side of that is very much a competition story and so very happy to get into the detail. On the margin side, I think there's also an element there of mortgage credit growth has just been a bit slower over the last two years or so, but competition has really been the big driver of the income pressure in mortgages. But also, you know, there's more people after mortgages. You know, we've got disruptions from other banks playing into that a little bit on the tech side, but more from other banks who are choosing to deploy capital into mortgages and have been doing that very successfully over the last few years.

People like me always talking about mortgages, people like you probably talk more about business banking and stuff like that because margins are actually higher in business banking. Why is it, I mean, three of the four off the top of my head, of the three of the form ages have talked about the success they've had in business banking. Is that kind of the new battlefield for banks? How do you characterize it? Yeah?

People like me always talking about mortgages, people like you probably talk more about business banking and stuff like that because margins are actually higher in business banking. Why is it, I mean, three of the four off the top of my head, of the three of the form ages have talked about the success they've had in business banking. Is that kind of the new battlefield for banks? How do you characterize it? Yeah?

I think that a very consistent theme over the last three or four reporting periods has been this redirection towards business lending growth. You know, on the really plus side, Australian business credit growth has been outperforming mortgage credit growth for two and a half years, three years. Maybe that is the sign of a normal economy really, but there's not been the case in Australia for a long, long, long, long time, and so that's a very positive thing. But as you rightly point out, the margins are higher in commercial lending and in business banking. You know, that's partly driven by risk and we should never forget that that is partly why. But it's also driven by the fact that it's you know, I think you can make, you know, deliver more value through relationship and through the service model. It's probably less commoditized as a part of the sector at the moment, but if everybody moves there, there's a really valid question around is it going to become, you know, just another hot area of the market and margins will feel some compression, but we don't see that yet.

I think that a very consistent theme over the last three or four reporting periods has been this redirection towards business lending growth. You know, on the really plus side, Australian business credit growth has been outperforming mortgage credit growth for two and a half years, three years. Maybe that is the sign of a normal economy really, but there's not been the case in Australia for a long, long, long, long time, and so that's a very positive thing. But as you rightly point out, the margins are higher in commercial lending and in business banking. You know, that's partly driven by risk and we should never forget that that is partly why. But it's also driven by the fact that it's you know, I think you can make, you know, deliver more value through relationship and through the service model. It's probably less commoditized as a part of the sector at the moment, but if everybody moves there, there's a really valid question around is it going to become, you know, just another hot area of the market and margins will feel some compression, but we don't see that yet.

Okay, So cost and cameratio, high net interest margins across the board, what are they looking like?

Okay, So cost and cameratio, high net interest margins across the board, what are they looking like?

Yeah, so margins, it's a really fascinating story and quite different in Australia compared to around the world. Actually, so margins for the year we're down about six bass points, marginally up in the second half actually because I think, as you said earlier, Sean people were being quite careful around some of the decisions they were making in the second half. But if you look at the margin position, one point eight one percent is you know, the overall margin for the majors at the end of the year that is now only about four basis points higher than the record low margin that was the position coming into the rate tightening cycle. So rates have gone up four hundred and thirty five basis points and the major's margins have gone up four basis points. That shows you how quickly this margin benefit snapped back through competition. And it's not just about mortgages, you know, it's deposits as well, has been very very hot over that period. Contrast that to some other markets. You know, the UK has seen nearly twenty thirty percent growth in bank earnings because of margin expansion.

Yeah, so margins, it's a really fascinating story and quite different in Australia compared to around the world. Actually, so margins for the year we're down about six bass points, marginally up in the second half actually because I think, as you said earlier, Sean people were being quite careful around some of the decisions they were making in the second half. But if you look at the margin position, one point eight one percent is you know, the overall margin for the majors at the end of the year that is now only about four basis points higher than the record low margin that was the position coming into the rate tightening cycle. So rates have gone up four hundred and thirty five basis points and the major's margins have gone up four basis points. That shows you how quickly this margin benefit snapped back through competition. And it's not just about mortgages, you know, it's deposits as well, has been very very hot over that period. Contrast that to some other markets. You know, the UK has seen nearly twenty thirty percent growth in bank earnings because of margin expansion.

Wow.

Wow.

And so they're all temporary. You know, in time they'll you know, they'll correct back. But it really does show the fact that competition in Australian banking is very very very tight and margin benefit of rate rises has not been significant. Big question as rates start to fall, which will happen who knows when you know, is that going to represent an opportunity for some kind of holding on of some margin through that period? Traditionally it wouldn't be. But we'll see, I suppose how that will play out.

And so they're all temporary. You know, in time they'll you know, they'll correct back. But it really does show the fact that competition in Australian banking is very very very tight and margin benefit of rate rises has not been significant. Big question as rates start to fall, which will happen who knows when you know, is that going to represent an opportunity for some kind of holding on of some margin through that period? Traditionally it wouldn't be. But we'll see, I suppose how that will play out.

Okay, So looking forward, where are the areas of growth? Should we worried about, be worried about sort of loan areas, about credit books, that type of thing.

Okay, So looking forward, where are the areas of growth? Should we worried about, be worried about sort of loan areas, about credit books, that type of thing.

Yeah, Look, I think starting with credit and that the kind of credit loss situation, it's still very very benign. So you know, credit expense in the period actually went down, and most banks signaled that there was some uptipic in areas. And I saw even today there was some published numbers that the number of customers in you know, in some trouble has risen quite significantly, but it's still very low in absolute terms, very low. So I think the banks would say, you know, this is what they expected. They've got provisions held for this type of performance and more because of the economics that the economy that they see. So look for now when we all touch with when we say these things, the credit outlook looks okay, there's decent questions like where is that risk if it's not on the bank balance sheets, and that might be a regulatory consequence that's on the credit side. Sean, I think on the broader outlook, we need to start with the good news is these banks are very high performing banks compared to most markets around the world, and so we should be very happy about that. But they've got the challenge of exactly what we've been talking about. They're squeezed on both ends a little bit competition and costs kind of squeezing the current result, and they've got a lot of work to do around modernization of technology. You know, a fair amount of demand around spend on tech, on rag etc. In an environment where they're very competitively concentrated. So I think in the short term, short term outperformance probably comes from those that can execute the best on those programs of work and just get them done and delivered, and who are really kind of operating with a lot of discipline around pricing and where they choose to play, et cetera. It's a kind of optimized play in the short term. The medium term, I think then we get into the really interesting stuff, and so who would want to be a bank exec right now? Because you're trying to do that optimize what you've got and then think about what the future holds. And I think that's where you get into really interesting things around. You know, is there going to be more diversification in banking? Are we going to see banks trying to get back into fee income generating businesses who could even contemplate wealth management? And you know, we have a country that is going to be retiring and needs these types of services and you know our banks have selected out of that understandably so over a period of time. And then much bigger things like you know the impact of technology and you know all of the things that will bring for customers.

Yeah, Look, I think starting with credit and that the kind of credit loss situation, it's still very very benign. So you know, credit expense in the period actually went down, and most banks signaled that there was some uptipic in areas. And I saw even today there was some published numbers that the number of customers in you know, in some trouble has risen quite significantly, but it's still very low in absolute terms, very low. So I think the banks would say, you know, this is what they expected. They've got provisions held for this type of performance and more because of the economics that the economy that they see. So look for now when we all touch with when we say these things, the credit outlook looks okay, there's decent questions like where is that risk if it's not on the bank balance sheets, and that might be a regulatory consequence that's on the credit side. Sean, I think on the broader outlook, we need to start with the good news is these banks are very high performing banks compared to most markets around the world, and so we should be very happy about that. But they've got the challenge of exactly what we've been talking about. They're squeezed on both ends a little bit competition and costs kind of squeezing the current result, and they've got a lot of work to do around modernization of technology. You know, a fair amount of demand around spend on tech, on rag etc. In an environment where they're very competitively concentrated. So I think in the short term, short term outperformance probably comes from those that can execute the best on those programs of work and just get them done and delivered, and who are really kind of operating with a lot of discipline around pricing and where they choose to play, et cetera. It's a kind of optimized play in the short term. The medium term, I think then we get into the really interesting stuff, and so who would want to be a bank exec right now? Because you're trying to do that optimize what you've got and then think about what the future holds. And I think that's where you get into really interesting things around. You know, is there going to be more diversification in banking? Are we going to see banks trying to get back into fee income generating businesses who could even contemplate wealth management? And you know, we have a country that is going to be retiring and needs these types of services and you know our banks have selected out of that understandably so over a period of time. And then much bigger things like you know the impact of technology and you know all of the things that will bring for customers.

Yeah, it is fascinating if use westpeging example, the outgoing c p D King has spent all his time simplifying the bank and see him earlier on you said that this secretor is becoming much more simple now he's going And it's not necessary specific to WESTPEG, but what how do they find and how do they find revenew growth in the next ten years if they stick to their knitting only.

Yeah, it is fascinating if use westpeging example, the outgoing c p D King has spent all his time simplifying the bank and see him earlier on you said that this secretor is becoming much more simple now he's going And it's not necessary specific to WESTPEG, but what how do they find and how do they find revenew growth in the next ten years if they stick to their knitting only.

Yeah, we absolutely agree, and you know that has been understandably the theme of banking around the world, and definitely in Australia has been read. An investor presentation it's been focus, core, simplify, it's all that language around really getting clear and you can understand why. Then the question becomes, okay, where does growth come from now? And if it's not going to come from credit growth the margins, which it probably isn't certainly in the short term, then you start to think about some really interesting things about well, okay, you know, what are the value pools that a bank needs to think about going after the income, etc. And I think what we'll see is that banks will be much more intentional about the parts of the market that they serve and where they think they've got advantage because there are differences. You know, some banks have a more international view, you have deeper in payments, some are bigger in retail. There are differences, and so I I think we'll just see people be much more intentional about what they choose to be and where they choose to be it. But it's going to be fascinating because it's an open question where's growth going to come from?

Yeah, we absolutely agree, and you know that has been understandably the theme of banking around the world, and definitely in Australia has been read. An investor presentation it's been focus, core, simplify, it's all that language around really getting clear and you can understand why. Then the question becomes, okay, where does growth come from now? And if it's not going to come from credit growth the margins, which it probably isn't certainly in the short term, then you start to think about some really interesting things about well, okay, you know, what are the value pools that a bank needs to think about going after the income, etc. And I think what we'll see is that banks will be much more intentional about the parts of the market that they serve and where they think they've got advantage because there are differences. You know, some banks have a more international view, you have deeper in payments, some are bigger in retail. There are differences, and so I I think we'll just see people be much more intentional about what they choose to be and where they choose to be it. But it's going to be fascinating because it's an open question where's growth going to come from?

Sure? Well, Sam, thank you for talking to Fear and Greed.

Sure? Well, Sam, thank you for talking to Fear and Greed.

Thanks Sean, I appreciate the time that was.

Thanks Sean, I appreciate the time that was.

Sam Garland, Banking and Capital Markets leader at PwC Australia. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed business news for people who make their own decisions. I'm Chane Elmer. Enjoy your day.

Sam Garland, Banking and Capital Markets leader at PwC Australia. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed business news for people who make their own decisions. I'm Chane Elmer. Enjoy your day.