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Speaker 1: Welcome to Fear and Greed Q and A where we

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Speaker 1: ask and answer questions about business, investing, economic politics and more.

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Speaker 1: I'm Michael Thompson and today three key takeaways from the

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Speaker 1: big bank results. Now this reporting season we've had quarterly

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Speaker 1: updates from Westpac and NAB and full year results from

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Speaker 1: Commonwealth Bank. Westpac's results showed a fourteen percent increase in

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Speaker 1: net profit for the quarter to one point nine billion dollars,

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Speaker 1: net interesting comers four percent higher. NAB two delivered lending

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Speaker 1: growth and improved margins. Commonwealth Bank cash profits rose four

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Speaker 1: percent to a record ten point twenty five billion dollars

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Speaker 1: for the full year. Growth in loans are decline in

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Speaker 1: bad debts. But if we put the numbers to one side,

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Speaker 1: just for a moment, what should we be taking away

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Speaker 1: from the all important banking sector. Noel Williams is PwC,

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Speaker 1: Australia's Banking and Capital Markets leader. Noel, welcome back to

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Speaker 1: Fear and Greed Q and a.

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Speaker 2: Thanks Michael, happy to be back.

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Speaker 1: So, in looking at these bank results, there is a

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Speaker 1: lot in all of this I'm asking, I'm almost asking

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Speaker 1: the impossible. Can you distill it down to the three

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Speaker 1: key takeaways in the first being this increasing competition that

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Speaker 1: banks are seeing from private credit.

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Speaker 2: Yeah, it's an excellent point, Michael. I mean we get

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Speaker 2: as you noted there, we have three of the banks

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Speaker 2: where we have results for this quarter. But what we

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Speaker 2: do have is across the system, we have the RBA

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Speaker 2: and the approstats, and so we use those numbers to

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Speaker 2: give us a view on system growth and market share.

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Speaker 2: And when we look at that, we are seeing that,

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Speaker 2: you know, the competition remains steady. We set it at

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Speaker 2: the half we're seeing it again where the market share overall,

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Speaker 2: whilst there is growth of the major banks, it is

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Speaker 2: a decline in market share and losing it in particular

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Speaker 2: to the nbfi's which are your non banking financial institutions

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Speaker 2: i e. Private credit. And mind you that only represents

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Speaker 2: a small segment of that overall private credit market. But

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Speaker 2: I think it's a really important indicator that our banks

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Speaker 2: are having to not only defend market share amongst themsel,

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Speaker 2: but now they're competing with their non major counterparts as

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Speaker 2: well as those in that non banking financial institution space

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Speaker 2: where there's a bit more agility, a bit more specialization.

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Speaker 1: Is that what is giving the private credit lenders the

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Speaker 1: advantage here is it the agility, or is it the

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Speaker 1: innovation or is it almost a regulatory advantage that they have.

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Speaker 2: Yeah, so there's all three of those things. In particular,

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Speaker 2: you know, there is a bit of regulatory arbitrage, so

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Speaker 2: if you're not a bank, you do have slightly different

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Speaker 2: and a broader ability to lend, and your standards are different.

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Speaker 2: So whilst we have unquestionably strong banks in Australia and

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Speaker 2: I think that's where APPRA wants to stay, it does

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Speaker 2: mean that there are certain segments of the market that

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Speaker 2: the banks just can't address, and in particular in business banking.

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Speaker 1: Okay, looking ahead, then in business banking, what are we

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Speaker 1: going to see because over the last decade, I suppose

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Speaker 1: in mortgages we've seen this margin erosion. Are we going

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Speaker 1: to see the same thing playing out now in business banking?

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Speaker 2: That is absolutely the fear, and the banks have said

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Speaker 2: that publicly as well, that they are worried about increasing

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Speaker 2: competition in this space. So every single bank has business

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Speaker 2: on their strategic priorities, so not just the big into town,

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Speaker 2: but the smaller end as well. And that's no surprise

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Speaker 2: given that there was larger margins in the business segment.

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Speaker 2: But of course when there's larger margins, that's because it's

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Speaker 2: a riskier segment to be in, right, So again our

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Speaker 2: banks are limited by the prudential standards that they have

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Speaker 2: to lend within and also within their risk appetites. And

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Speaker 2: in addition to that, as they then have a smaller

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Speaker 2: segment of the business segment that they can focus on,

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Speaker 2: they start to compete with themselves, and with that you

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Speaker 2: have the potential for the margin erosion that we saw

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Speaker 2: happen with mortgages. And so, you know, can they continue

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Speaker 2: to increase the volumes such that they sort of outrun

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Speaker 2: that margin erosion and keep their net interest income outpacing

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Speaker 2: their nim pressures. But again, growth can't continue forever.

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Speaker 1: All right, So the increased competition there is the first

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Speaker 1: of the key takeaways, second being stagnation almost in productivity

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Speaker 1: within the banks.

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Speaker 2: Yeah. So at the half we saw that operating expenses

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Speaker 2: had hit like a decade high of twenty two point

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Speaker 2: six billion, and we report that at the half because

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Speaker 2: that's when we had all four of the banks reporting.

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Speaker 2: But you know, we know that over this past quarter

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Speaker 2: everybody's expenses have increased as well, and when we look

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Speaker 2: at some of those key ratios like cost to income

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Speaker 2: and expense to income that those have held study for

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Speaker 2: some time, and not to mention that we've also seen

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Speaker 2: in particular labor costs increasing steadily over the last three years,

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Speaker 2: which just indicates that, you know, the need to keep

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Speaker 2: up with tech modernization, with regulatory change and all the

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Speaker 2: other innovation agendas that the banks have on is putting

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Speaker 2: them in a position that's making it very hard to

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Speaker 2: bring their expenses down at all and to get over

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Speaker 2: sort of that innovation hurdle where they can start having

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Speaker 2: more efficiencies.

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Speaker 1: Is it an execution problem here theen or are they

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Speaker 1: actually just hitting the limits of what can be achieved

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Speaker 1: through kind of cloud outsourcing, offshoring, all the different measures

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Speaker 1: that you have to improve productivity. Have they just hit

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Speaker 1: the limit?

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Speaker 2: Yeah, you've named all the big ones there that have

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Speaker 2: been tried over the last sort of fifteen years or so,

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Speaker 2: and I think we've definitely exhausted sort of any labor arbitrage,

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Speaker 2: data center arbitrage that there might be left in the system,

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Speaker 2: and so now you have to face into the real

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Speaker 2: work of retooling simplification. I suppose the good news and

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Speaker 2: the silver linings all of this is that we live

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Speaker 2: in a time where AI capability is increasing exponentially, and

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Speaker 2: so maybe there is a way out of this sort

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Speaker 2: of trap of having to try to modernize the technology

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Speaker 2: and innovate the technology at the same time.

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Speaker 1: Okay, which leads us very neatly into the third key takeaway,

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Speaker 1: which is about the role of AI and the fact

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Speaker 1: that we are at this pivotal moment now for the

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Speaker 1: banks in terms of how they use AI to really

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Speaker 1: improve processes, improve productivity, and increase that profit margin.

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Speaker 2: Yeah. I mean, AI is such a huge topic, but

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Speaker 2: I think if we talk about it in this context,

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Speaker 2: you could be looking at your technology roadmap that you

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Speaker 2: might have designed a year ago and saying that you're

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Speaker 2: going to spend five years plus retooling and transforming and

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Speaker 2: modernizing all of your core systems, and you could almost

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Speaker 2: put that to one side and start over afresh given

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Speaker 2: the capabilities that AI is presenting now. And so what

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Speaker 2: we think is a potential opportunity here is to actually

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Speaker 2: do what we would call the tinkering, where you're putting

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Speaker 2: AI into existing workflows and processes to get uplift in productivity.

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Speaker 2: But then also looking at these technology modernization roadmaps and

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Speaker 2: thinking about what that looks like in an AI first,

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Speaker 2: agentic first world, and actually retooling your entire modernization roadmap

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Speaker 2: to be aiming for a brave new world of AI

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Speaker 2: first systems and workflows that then freeze up some of

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Speaker 2: that human capital to redeploy into actually talking to your

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Speaker 2: human customers.

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Speaker 1: It's potentially going to be a bumpy process, isn't it though?

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Speaker 1: Because we did see Commonwealth Bank having to backtrack on

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Speaker 1: cutting dozens of jobs and this was because of a

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Speaker 1: call center and the replacement or the introduction of an

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Speaker 1: AI voice spot, and they acknowledge that actually it didn't

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Speaker 1: reduce the amount of calls. The number of calls coming

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Speaker 1: in actually increase in the head to go backwards, and

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Speaker 1: so it is not going to be a smooth roll out,

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Speaker 1: is it.

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Speaker 2: It is a workforce issue and it is probably more

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Speaker 2: of a workforce issue than it is a tech issue.

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Speaker 2: And so the strategies that the banks need to be

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Speaker 2: looking at right now need to be quite holistic in

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Speaker 2: terms of what do you want the bank of the

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Speaker 2: future to actually look like, and if you do have

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Speaker 2: operational expenditure freed up and labor that is freed up,

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Speaker 2: where do you actually want to spend that money on

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Speaker 2: the humans? And so to say that we need to

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Speaker 2: see all of the expenses come down doesn't necessarily need

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Speaker 2: to be the answer. You could hold your expensive study,

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Speaker 2: but you might be redeploying those humans into more frontline

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Speaker 2: roles to actually connect with your customers one on one,

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Speaker 2: as opposed to having the time spent in the back

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Speaker 2: office where the customers actually don't feel the benefit of

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Speaker 2: that labor spend.

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Speaker 1: Okay, if any particular bank isn't going all in now

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Speaker 1: on AI is this are they going to fall behind?

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Speaker 2: That would be the real worry. I mean, on top

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Speaker 2: of all of this increasing competition from your non bank

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Speaker 2: financial institutions and the smaller banks who are more agile

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Speaker 2: in some ways, you also have APPA talking about an

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Speaker 2: easier pathway to your banking license. And so if your

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Speaker 2: startup today, with all of the capabilities of AI in

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Speaker 2: front of you, you could make a really compelling customer

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Speaker 2: first expense lean operations and go out there and get

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Speaker 2: a huge market share. So if you're one of these majors,

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Speaker 2: you really have to be patient. You've got to lean in,

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Speaker 2: you've got to spend a bit more to get over

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Speaker 2: that hurdle to your actual efficiency gains that you can

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Speaker 2: get from AI.

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Speaker 1: So it's not just improving productivity themselves, it's the potential

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Speaker 1: for AI fueled competition from new players. Yeah, okay, all right,

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Speaker 1: So they are the top three takeaways that we've got.

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Speaker 1: So we've got banks facing this increased competition, particularly from

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Speaker 1: private credit, but on business lending, the three year productivity stagnation,

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Speaker 1: and then the role of AI and the potential for

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Speaker 1: really a make or break moment four banks. Noel, thank

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Speaker 1: you for talking to Fear and Greed.

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Speaker 2: Thanks Michael.

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Speaker 1: That was Noel Williams, PwC, Australia's Banking and Capital Markets leader.

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Speaker 1: If you've got something that you'd like to know, something

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Speaker 1: you'd like us to delve into, then please send me

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Speaker 1: your question on LinkedIn, Instagram, Facebook, or at Fearandgreed dot

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Speaker 1: com dot AU. I'm Michael Thompsons Fear and Greed Q

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Speaker 1: and A