1 00:00:03,210 --> 00:00:06,960 Sean Aylmer : Welcome to the Fear and Greed Daily interview. I'm Sean Aylmer. Australian 2 00:00:06,960 --> 00:00:09,660 Sean Aylmer : banks have delivered pretty solid half year results with the 3 00:00:09,660 --> 00:00:14,130 Sean Aylmer : four major banks reporting almost $ 17 billion in combined statutory 4 00:00:14,130 --> 00:00:18,270 Sean Aylmer : earnings. That's up about 11% on the 2022 half- year 5 00:00:18,270 --> 00:00:21,450 Sean Aylmer : results, but there are plenty of headwinds with rising funding 6 00:00:21,450 --> 00:00:25,650 Sean Aylmer : costs, competitive pricing, and other things likely to tighten margins. 7 00:00:25,800 --> 00:00:28,440 Sean Aylmer : And then there's the recent turmoil out of the US 8 00:00:28,440 --> 00:00:32,220 Sean Aylmer : threatening to infect global financial systems. Doug Nixon is the 9 00:00:32,220 --> 00:00:36,270 Sean Aylmer : Oceania Banking and Capital Markets Lead at EY. Doug, welcome 10 00:00:36,270 --> 00:00:37,080 Sean Aylmer : back to Fear and Greed. 11 00:00:37,500 --> 00:00:39,360 Doug Nixon: Hi, Sean. Great to be here with you today. 12 00:00:39,960 --> 00:00:44,130 Sean Aylmer : So top line, how is the health of the big 13 00:00:44,130 --> 00:00:45,240 Sean Aylmer : four Australian banks? 14 00:00:45,570 --> 00:00:49,229 Doug Nixon: Thanks, Sean. So Australian big four banks have delivered generally 15 00:00:49,229 --> 00:00:51,839 Doug Nixon: positive half- year results, but it is clear that they 16 00:00:51,840 --> 00:00:57,210 Doug Nixon: are facing challenges ahead in an increasingly uncertain and volatile environment. 17 00:00:57,660 --> 00:01:00,450 Doug Nixon: As you noted, statutory earnings for the industry have increased 18 00:01:00,450 --> 00:01:04,800 Doug Nixon: on average 10. 8%. Also, net interest margin or NIM 19 00:01:04,800 --> 00:01:08,730 Doug Nixon: has increased 17 basis points, and credit provisions increasing by 20 00:01:08,730 --> 00:01:13,170 Doug Nixon: about 4.3%. And that's really all supported by a resilient 21 00:01:13,170 --> 00:01:17,130 Doug Nixon: Australian economy that has continued to provide credit growth and 22 00:01:17,130 --> 00:01:20,370 Doug Nixon: credit quality while cash rates have helped drive high revenues 23 00:01:20,370 --> 00:01:24,149 Doug Nixon: and NIM expansion in the half. However, retail credit growth 24 00:01:24,150 --> 00:01:29,940 Doug Nixon: compression is creating highly competitive pricing practices, funding costs are rising, 25 00:01:30,030 --> 00:01:33,240 Doug Nixon: NIM is under pressure and inflation continues to challenge the 26 00:01:33,240 --> 00:01:36,510 Doug Nixon: bank's operating costs. So the banks are really walking a 27 00:01:36,510 --> 00:01:38,970 Doug Nixon: tightrope at the moment and they're going to need to 28 00:01:38,970 --> 00:01:43,620 Doug Nixon: carefully balance capital allocation, pricing and funding decisions to navigate 29 00:01:43,620 --> 00:01:44,250 Doug Nixon: the market ahead. 30 00:01:45,240 --> 00:01:47,250 Sean Aylmer : Okay, so we might unravel a few of those things. 31 00:01:47,250 --> 00:01:50,010 Sean Aylmer : Let's start with the commentary from the CEOs and not 32 00:01:50,220 --> 00:01:54,029 Sean Aylmer : picking on any of them specifically, but generally, the three 33 00:01:54,030 --> 00:01:57,090 Sean Aylmer : that have reported in the past 10 days or so. 34 00:01:57,090 --> 00:02:00,300 Sean Aylmer : So Westpac, ANZ and National Australia Bank, and Commonwealth Bank 35 00:02:00,300 --> 00:02:02,940 Sean Aylmer : a few months back, the CEOs have all come out 36 00:02:02,940 --> 00:02:05,040 Sean Aylmer : and said, " Hey, yeah, we had a pretty good time 37 00:02:05,790 --> 00:02:08,820 Sean Aylmer : towards the end of last year, but things are going to be much tougher 38 00:02:08,820 --> 00:02:10,830 Sean Aylmer : over the next six months." Why is that? 39 00:02:11,490 --> 00:02:14,910 Doug Nixon: That's a great question, Sean. And you remember back to 40 00:02:14,910 --> 00:02:19,230 Doug Nixon: the FY2022 full year results, we saw that was a tale 41 00:02:19,230 --> 00:02:22,500 Doug Nixon: of two halves, that benefit of the rapid increase in 42 00:02:22,500 --> 00:02:24,810 Doug Nixon: the cash rates providing a boost in the second half 43 00:02:24,840 --> 00:02:28,320 Doug Nixon: of FY2022. And over the last six months, we've certainly 44 00:02:28,320 --> 00:02:32,790 Doug Nixon: seen that trend continue, which is supported in the headline results. However, 45 00:02:32,790 --> 00:02:36,810 Doug Nixon: in the outlook that competitive pressures along with market volatility 46 00:02:36,810 --> 00:02:40,560 Doug Nixon: are really starting to manifest and that's impacting pricing options, 47 00:02:40,560 --> 00:02:44,730 Doug Nixon: funding costs, and introducing increased uncertainty for the second half 48 00:02:44,730 --> 00:02:48,630 Doug Nixon: of FY23. And so to give you some examples, slow 49 00:02:48,630 --> 00:02:53,760 Doug Nixon: retail credit growth, that's been creating some highly competitive pricing practices. 50 00:02:54,060 --> 00:02:58,799 Doug Nixon: And you've probably heard industry commentators noting pricing of mortgages, 51 00:02:58,800 --> 00:03:02,550 Doug Nixon: for example, below the cost of capital. Funding costs as well, 52 00:03:02,550 --> 00:03:06,000 Doug Nixon: they are rising and that's amplified not only by the 53 00:03:06,000 --> 00:03:09,000 Doug Nixon: recent dislocation of the financial markets, which you referred to 54 00:03:09,000 --> 00:03:14,040 Doug Nixon: before but also really competitive behaviors in deposit markets. And 55 00:03:14,040 --> 00:03:17,070 Doug Nixon: a number of institutions noting that resulting pressure on net 56 00:03:17,070 --> 00:03:21,209 Doug Nixon: interest margin and suggesting that NIM may have now peaked. 57 00:03:21,450 --> 00:03:25,740 Doug Nixon: And then last but not least, all important inflationary pressures 58 00:03:25,740 --> 00:03:28,860 Doug Nixon: continue to challenge the bank operating costs. And a number 59 00:03:28,860 --> 00:03:33,660 Doug Nixon: of banks provided details on increasing costs components such as wages, 60 00:03:33,660 --> 00:03:36,810 Doug Nixon: for example, that continue to drive up operating costs for 61 00:03:36,810 --> 00:03:37,500 Doug Nixon: the industry. 62 00:03:37,860 --> 00:03:40,050 Sean Aylmer : Listening to you there, Doug, what are the levers in 63 00:03:40,050 --> 00:03:43,260 Sean Aylmer : that the banks have got to pull to actually make 64 00:03:43,260 --> 00:03:45,839 Sean Aylmer : things better? If their net interest margin, which is effectively 65 00:03:45,840 --> 00:03:48,570 Sean Aylmer : the difference between what they are paying out on deposits 66 00:03:48,570 --> 00:03:52,529 Sean Aylmer : and receiving on loans, if they've peaked at least, what 67 00:03:52,530 --> 00:03:54,630 Sean Aylmer : are the levers for them to make more money? 68 00:03:55,320 --> 00:04:00,750 Doug Nixon: Well, there's a few that they have or there's a plethora they have, Sean. First of all 69 00:04:01,140 --> 00:04:04,290 Doug Nixon: is looking at the cost base and most institutions have 70 00:04:04,290 --> 00:04:10,260 Doug Nixon: significant either efficiency or cost takeout programs underway that they implement when 71 00:04:10,590 --> 00:04:14,850 Doug Nixon: there is inflation and inflationary costs. And they still have ongoing, 72 00:04:15,060 --> 00:04:19,110 Doug Nixon: for example, regulatory and compliance costs. Then there are the 73 00:04:19,110 --> 00:04:23,880 Doug Nixon: market practices that they pursue for their various product lines, 74 00:04:23,970 --> 00:04:26,279 Doug Nixon: when issuing a product in the market like a new mortgage, 75 00:04:26,279 --> 00:04:30,300 Doug Nixon: how competitively they want to pursue that mortgage, and therefore 76 00:04:30,300 --> 00:04:33,150 Doug Nixon: the yield that they get on that mortgage. And this 77 00:04:33,150 --> 00:04:36,000 Doug Nixon: is that narrative that crept into some of the year- 78 00:04:36,000 --> 00:04:40,979 Doug Nixon: end results presentations about institutions perhaps pulling back from some 79 00:04:40,980 --> 00:04:45,060 Doug Nixon: of the competitive behaviours in retail credit products, for example. 80 00:04:45,660 --> 00:04:50,160 Doug Nixon: And then another lever they have, and I might touch 81 00:04:50,160 --> 00:04:53,310 Doug Nixon: on this one, and one more, is where they get their 82 00:04:53,310 --> 00:04:56,219 Doug Nixon: funding from and how they get their funding. And that 83 00:04:56,220 --> 00:05:00,839 Doug Nixon: is the, one component of that is, for example, retail deposits. 84 00:05:00,839 --> 00:05:07,740 Doug Nixon: And they'll make choices on how competitive that they want to be in retail deposits, i.e. how much interest they will 85 00:05:07,740 --> 00:05:11,970 Doug Nixon: pay when a customer deposits money with them. And then last 86 00:05:11,970 --> 00:05:15,360 Doug Nixon: but not least, and probably most importantly, they'll make decisions 87 00:05:15,360 --> 00:05:20,850 Doug Nixon: on capital allocation and preference for what markets they're competing in, 88 00:05:20,850 --> 00:05:27,000 Doug Nixon: whether it be institutional, retail, business bank, international, so on 89 00:05:27,000 --> 00:05:29,250 Doug Nixon: and so forth. So they've got a number of levers 90 00:05:29,250 --> 00:05:32,130 Doug Nixon: to pull, but it'll be a very careful balancing act 91 00:05:32,130 --> 00:05:34,440 Doug Nixon: for this coming half and in the years ahead. 92 00:05:35,160 --> 00:05:38,489 Sean Aylmer : Okay. Just want to ask you to explain something there, Doug, 93 00:05:38,490 --> 00:05:42,060 Sean Aylmer : when you talk about they can put capital into retail banking, 94 00:05:42,060 --> 00:05:46,200 Sean Aylmer : or business banking, or institutional banking. The cost of putting 95 00:05:46,200 --> 00:05:50,159 Sean Aylmer : that capital into those is actually different, so $10 in a 96 00:05:50,160 --> 00:05:53,489 Sean Aylmer : home loan is different to $10 in a institutional banking. Is 97 00:05:53,490 --> 00:05:53,880 Sean Aylmer : that right? 98 00:05:54,510 --> 00:05:59,070 Doug Nixon: Yeah, that's right. And because of the competitive behaviors that 99 00:05:59,070 --> 00:06:03,930 Doug Nixon: have been occurring in markets, there has been a return 100 00:06:03,930 --> 00:06:08,250 Doug Nixon: on equity or return on capital compression in, for example, 101 00:06:08,460 --> 00:06:13,109 Doug Nixon: retail credit price, particularly in the retail markets. So because 102 00:06:13,110 --> 00:06:18,060 Doug Nixon: of the pricing practices there, returns have been compressed. Where 103 00:06:18,060 --> 00:06:22,080 Doug Nixon: they haven't been so compressed elsewhere across the market, for 104 00:06:22,080 --> 00:06:27,539 Doug Nixon: example, in business banking yields would typically be higher for 105 00:06:27,540 --> 00:06:30,720 Doug Nixon: capital injected into those parts of the business. But Sean, 106 00:06:30,720 --> 00:06:34,260 Doug Nixon: importantly, this is not a magic switch that any one 107 00:06:34,260 --> 00:06:37,710 Doug Nixon: of the institutions can just flick on or off. It 108 00:06:37,710 --> 00:06:42,510 Doug Nixon: takes time to deploy that capital, to pursue market share 109 00:06:42,510 --> 00:06:45,600 Doug Nixon: and to acquire clients, and to build infrastructure to support 110 00:06:45,600 --> 00:06:48,570 Doug Nixon: all the processes. And that's part of the challenge that 111 00:06:48,570 --> 00:06:51,900 Doug Nixon: the institutions will be facing over the coming years. 112 00:06:51,990 --> 00:06:53,910 Sean Aylmer : Stay with me, Doug, we'll be back in a minute. 113 00:06:59,550 --> 00:07:03,270 Sean Aylmer : I'm speaking to Doug Nixon, Oceania Banking and Capital Markets 114 00:07:03,270 --> 00:07:06,660 Sean Aylmer : Leader at EY. What about credit quality? That's always a 115 00:07:06,660 --> 00:07:10,020 Sean Aylmer : big one when the banks are reporting and particularly since we're 116 00:07:10,080 --> 00:07:12,360 Sean Aylmer : certainly in a slower economy than we were a year 117 00:07:12,360 --> 00:07:14,400 Sean Aylmer : or two ago. What are the banks saying on that? 118 00:07:15,390 --> 00:07:20,730 Doug Nixon: So credit quality still remains surprisingly robust, although we are 119 00:07:20,730 --> 00:07:25,470 Doug Nixon: seeing early signs of deterioration. So in very small components 120 00:07:25,470 --> 00:07:30,180 Doug Nixon: of RESI portfolios, for example, a really good indicator of this, Sean, 121 00:07:30,180 --> 00:07:34,200 Doug Nixon: is overall provision levels. And we saw in the results 122 00:07:34,350 --> 00:07:40,140 Doug Nixon: overall provisions for the industry increase about 4.3%, which is indicating 123 00:07:40,440 --> 00:07:45,660 Doug Nixon: that the banks are expecting higher levels of credit impairments 124 00:07:45,720 --> 00:07:47,100 Doug Nixon: in the coming period. 125 00:07:47,370 --> 00:07:49,590 Sean Aylmer : What about what's going on in the US? We have seen some 126 00:07:49,620 --> 00:07:54,030 Sean Aylmer : amazing share price moves in single sessions, some of the 127 00:07:54,030 --> 00:07:57,990 Sean Aylmer : regional banks, particularly in California, it seems. What sort of 128 00:07:57,990 --> 00:08:02,370 Sean Aylmer : contagion effect does that have on local banks? Just park 129 00:08:02,370 --> 00:08:05,790 Sean Aylmer : the share price movement. What about the actual operation? Does 130 00:08:05,790 --> 00:08:06,240 Sean Aylmer : it matter? 131 00:08:07,230 --> 00:08:10,440 Doug Nixon: Yeah, it's a really good question, Sean, and it has been 132 00:08:10,560 --> 00:08:14,220 Doug Nixon: fascinating to watch what's unfolded, not only in the US 133 00:08:14,220 --> 00:08:17,880 Doug Nixon: markets but the contagion effects that we've seen bleeding over 134 00:08:17,880 --> 00:08:22,620 Doug Nixon: into the European markets as well. And I think everyone's 135 00:08:22,620 --> 00:08:25,740 Doug Nixon: been holding their breath a little bit as that unfolds 136 00:08:25,740 --> 00:08:30,030 Doug Nixon: and continues to unfold, but impacts to the Australian financial 137 00:08:30,030 --> 00:08:33,390 Doug Nixon: system to date have been relatively mild. History tells us 138 00:08:33,390 --> 00:08:36,689 Doug Nixon: that tightening cycles do tend to flush out hidden weaknesses 139 00:08:36,690 --> 00:08:40,620 Doug Nixon: in the financial system. And Australia has been a beneficiary 140 00:08:40,620 --> 00:08:45,630 Doug Nixon: of a very conservative approach to capital and liquidity regulation. However, 141 00:08:45,630 --> 00:08:51,030 Doug Nixon: even Australia's well- positioned banks will need to closely monitor 142 00:08:51,030 --> 00:08:56,220 Doug Nixon: and stay ahead of the current environment. Probably the most material 143 00:08:56,220 --> 00:09:00,900 Doug Nixon: impacts has come through in cost of funds and we've 144 00:09:00,900 --> 00:09:04,230 Doug Nixon: certainly seen an increase in that space, letting back into, 145 00:09:04,230 --> 00:09:08,670 Doug Nixon: of course, the all- important NIM, but in terms of 146 00:09:09,150 --> 00:09:15,239 Doug Nixon: significant volatility to the Australian banks, be highly unlikely that 147 00:09:15,240 --> 00:09:18,450 Doug Nixon: we'd see anything like the US play out in these markets. 148 00:09:19,020 --> 00:09:22,050 Sean Aylmer : So to wrap it up, where are Australian banks as 149 00:09:22,050 --> 00:09:27,000 Sean Aylmer : we sit here in May 2023, vis-a-vis where they've been 150 00:09:27,270 --> 00:09:28,860 Sean Aylmer : in, I mean, I'm going to say in the last 10 to 151 00:09:28,920 --> 00:09:32,099 Sean Aylmer : 15 years, only because that's been a falling interest rate 152 00:09:32,100 --> 00:09:36,060 Sean Aylmer : environment. In some ways that has squeezed profitability of banks, 153 00:09:36,870 --> 00:09:40,620 Sean Aylmer : where they sit today without being specific on any particular 154 00:09:40,620 --> 00:09:43,470 Sean Aylmer : bank. What's the future look like? 155 00:09:44,429 --> 00:09:49,710 Doug Nixon: So this set of results represents, I think a generally 156 00:09:49,710 --> 00:09:52,949 Doug Nixon: good set of results for the industry as a whole. 157 00:09:53,010 --> 00:09:57,000 Doug Nixon: And we've seen improvements over the past 18 months as 158 00:09:57,000 --> 00:10:01,380 Doug Nixon: banks have capitalised on the changing rate environment. But looking 159 00:10:01,380 --> 00:10:05,520 Doug Nixon: through these results, we've seen this consistent messaging that while 160 00:10:05,520 --> 00:10:10,110 Doug Nixon: these results have been generally positive, the industry is entering into a 161 00:10:10,110 --> 00:10:15,090 Doug Nixon: difficult period, that difficult balancing act, that tightrope walk, if you will, 162 00:10:15,540 --> 00:10:19,200 Doug Nixon: while they try and manage all of these factors that 163 00:10:19,200 --> 00:10:23,430 Doug Nixon: is now starting to manifest in competition, in funding costs 164 00:10:23,580 --> 00:10:26,670 Doug Nixon: and inflationary pressures, as they manifest in the industry. 165 00:10:27,300 --> 00:10:29,190 Sean Aylmer : Doug, thank you for talking to Fear and Greed. 166 00:10:29,760 --> 00:10:31,440 Doug Nixon: Sean, thank you very much for having me. 167 00:10:32,010 --> 00:10:35,370 Sean Aylmer : That was Doug Nixon, Oceania Banking and Capital Markets Leader 168 00:10:35,370 --> 00:10:38,220 Sean Aylmer : at EY. This is the Fear and Greed Daily Interview. 169 00:10:38,220 --> 00:10:40,260 Sean Aylmer : Join us every morning for the full episode of Fear 170 00:10:40,260 --> 00:10:43,709 Sean Aylmer : and Greed, Australia's most popular business podcast. I'm Sean Aylmer, 171 00:10:43,920 --> 00:10:44,610 Sean Aylmer : enjoy your day.