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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, economics, politics and more.

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Speaker 1: I'm Sean Almer. Three of the big four banks have

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Speaker 1: all reported results in the last eight days. National Australian Bank,

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Speaker 1: as Eden, Westpac with the CEOs of war three less

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Speaker 1: than two years into their roles. At the same time,

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Speaker 1: there's fierce competition over business banking and the increasing presence

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Speaker 1: of the fifth major player, Marquari, particularly in the home

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Speaker 1: lending market. I wanted to take a look at the

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Speaker 1: key themes from the bank's results. Commonwealth Bank, of course

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Speaker 1: has a thirty June balanced state, so I think these

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Speaker 1: results including thirty gen balanced states for the Commonwealth Bank

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Speaker 1: and for the other three September thirty. Noel Williams is PwC,

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Speaker 1: Australia's Banking Capital Markets leader. Now, well, welcome back to

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Speaker 1: Fear and Greed.

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Speaker 2: Thank you great to be here again.

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Speaker 1: So broadly, how do you think the banks are performing?

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Speaker 2: So broadly and Broadley's gre term for it, because of

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Speaker 2: course we always look across the four major banks and

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Speaker 2: want to give that commentary on system and how it's

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Speaker 2: going for our major banks. Here in Australia given that

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Speaker 2: they are the cornerstone of our financial system here, and

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Speaker 2: you know, broadly it's stable, but there's definitely a change

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Speaker 2: in focus and there's some real transformational shifts happening within

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Speaker 2: the banks.

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Speaker 1: Okay, so let's dig into it a little bit. They

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Speaker 1: all seem to have come out over the past week

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Speaker 1: and Commonwealth will have released its quarterly shortly. But home lending,

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Speaker 1: business lending and deposits, they all seem to be singing

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Speaker 1: to the same tune there.

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Speaker 2: Correct. Yeah, we've had a change in CEOs, as you mentioned,

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Speaker 2: across three of the four in the last two years,

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Speaker 2: which has been characterized through a reconfiguration of leadership teams

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Speaker 2: and restrategy and refocus. And yet we seem to be

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Speaker 2: in this place where there really has been a honing

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Speaker 2: in on these three key areas, and of course were

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Speaker 2: seeing that competition play through and these results and in

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Speaker 2: the market.

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Speaker 1: Okay, and now home lending is that because it's more profitable.

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Speaker 1: And when we're saying more profitable, it's not just how

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Speaker 1: much interest people are paying, it's also the fact that

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Speaker 1: I have to hold as much capital with the regulator

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Speaker 1: on that one. So home lending I get business lending.

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Speaker 1: Is it the profit margins business lending higher? Is that

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Speaker 1: why they're enjoying their pushing that business lending market.

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Speaker 2: So with home lending, it's a real focus on the

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Speaker 2: proprietary lending and so to get that shift away from

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Speaker 2: the broker channels and so moving away from having to

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Speaker 2: pay those feasing commissions to brokers and being able to

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Speaker 2: keep that margin for themselves at the banks. So the

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Speaker 2: home lending focus is a focus on proprietary lending. We

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Speaker 2: did hear it noted and most of the presentations that

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Speaker 2: there has been an uptake and prop lending. So I

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Speaker 2: think they're pleased with that, but there is quite a

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Speaker 2: long way to grow in that space. We still have

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Speaker 2: the majority of our mortgages in Australia being written by

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Speaker 2: brokers and that is actually a competitive point across the

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Speaker 2: entire of the industry, that's not just our majors, and

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Speaker 2: so it does remain in focus. It does remain competitive.

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Speaker 2: That said, home lending does still make up the majority

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Speaker 2: of their lending books and we do think that maybe

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Speaker 2: some of that pricing competition has eased, or at least

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Speaker 2: the pricing below the cost of capital that we had

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Speaker 2: seen in the past, and so we did see a

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Speaker 2: studying them result come through. For the banks. You mentioned

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Speaker 2: business lending, business lending being sort of their second pillar

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Speaker 2: of strategic focus. Again, it's a focus not just with

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Speaker 2: the majors but across the entirety of the industry. And

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Speaker 2: as you rightly said, there as traditionally higher margins in

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Speaker 2: business lending, and that is because of the higher risk

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Speaker 2: that comes with business lending, higher risk, higher returns, higher

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Speaker 2: margins to offset that. That said again then remains pretty steady.

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Speaker 2: So I think we're seeing that competition play out, which

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Speaker 2: could be seen as they didn't get the profitability they

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Speaker 2: wanted on that segment, or you could also view that

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Speaker 2: as our Australian businesses are getting good value on there.

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Speaker 1: Okay, you use the acroman NME a net interest margin.

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Speaker 1: The other side of that, of course, is deposits. Now

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Speaker 1: your report talks about deposits reaching three trillion dollars for

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Speaker 1: the first time. That's a lot of money.

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Speaker 2: There's a lot of money. It is a lot of money.

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Speaker 2: And the deposits have just been increasing steadily over at

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Speaker 2: least the last decade. We are at a new all

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Speaker 2: time high and I suppose what underpins that is we

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Speaker 2: have large migration inflows in Australia. So we had the

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Speaker 2: COVID savings and then when that started to come off,

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Speaker 2: we had migration picking up again. We have retirees moving

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Speaker 2: into retirement phase that the Australia, the superannuation's coming in

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Speaker 2: as inflows, so we're seeing those deposit inflows continue to increase.

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Speaker 2: It is a competitive space and the pricing in that

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Speaker 2: space did negatively impact NIM this time around, but in

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Speaker 2: terms of the percentage of funding, it's at a high

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Speaker 2: point for the banks in terms of their funding mix

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Speaker 2: and having deposits there and deposits are very effective source

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Speaker 2: of funding for the banks to support their lending.

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Speaker 1: Okay, on the cost side, you said its expense to

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Speaker 1: income ratio excited fifty percent. It's highest point in at

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Speaker 1: least fifteen years.

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Speaker 2: Why is that Investments There's a lot of investments on

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Speaker 2: and so I touch technology. Yeah, technology is part of

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Speaker 2: that story, so with personnel and headcounts. So there's been

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Speaker 2: quite a lot of restructuring happening at the banks of

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Speaker 2: late and we've heard about that in the news, but

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Speaker 2: that restructuring does take time to flow through and at

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Speaker 2: the same time, the banks have been investing for their

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Speaker 2: strategic focus areas. So not only are they investing in

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Speaker 2: technology in particular looking at how they can modernize legacy systems,

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Speaker 2: but also capture the opportunities that are afforded through artificial intelligence.

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Speaker 2: And so they're investing in higher cost personnel who are

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Speaker 2: experienced engineers and technologists. And they're also investing in bankers

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Speaker 2: because they're chasing after that proprietary lending channels for home

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Speaker 2: lending and in the business space. So again those are

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Speaker 2: relations ship type bankers and their command a higher salary.

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Speaker 2: So whilst they might be doing some reconfiguration of their workforce,

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Speaker 2: what happened in this last quarter is that you actually

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Speaker 2: had an overlap with that reconfiguration, the cost of that

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Speaker 2: restructuring plus the new hires for these strategic areas coming in,

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Speaker 2: and we're at an all time high in terms of

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Speaker 2: headcount other banks.

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Speaker 1: Now, well, I have covered banks for twenty years, maybe

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Speaker 1: even longer, and I want to say every time there's results,

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Speaker 1: it's about there's always cost pressures. Is there ever a

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Speaker 1: time when the banks don't have cost pressures? Like I

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Speaker 1: kind of totally get what you're saying in you if

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Speaker 1: your westpaate, you've got to invest in technology to you know,

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Speaker 1: unit all your legacy systems. And there's this shift in

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Speaker 1: I mean, Ainze's girl is redundancy cost, but it's actually

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Speaker 1: shifting its focus. So without specifically asking about any bank,

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Speaker 1: there's always cost pressures in the in the banks, are

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Speaker 1: there times where they just do it better.

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Speaker 2: So I think that, I mean, I think we are

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Speaker 2: seeing a return to some of that fiscal discipline and

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Speaker 2: the desire to start capping the costs and containing those costs.

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Speaker 2: But you got to invest to save sometimes, and I

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Speaker 2: think this is one of those areas where you do.

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Speaker 2: There are some legacy systems out there that have been

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Speaker 2: left untouched for quite a long time and really need

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Speaker 2: to be addressed and brought into the modern age so

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Speaker 2: that the banks can really grasp what's ahead of them

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Speaker 2: in terms of capturing the opportunities around artificial intelligence, particularly agentic,

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Speaker 2: which should be able to drive them towards greater productivity.

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Speaker 2: And of course as a nation we're facing into productivity

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Speaker 2: challenges as well, so our banks are no different. And

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Speaker 2: I think we're just seeing that play through and these

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Speaker 2: results in terms of that cost to income ratio, and

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Speaker 2: they're operating expenses being so high remains to be seen

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Speaker 2: those So, like I said, there was quite a bit

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Speaker 2: of one off charges around the restructuring. There is quite

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Speaker 2: a high degree and an increase investment spend as well,

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Speaker 2: And so we are seeing these new relatively new leadership

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Speaker 2: teams reconfiguring themselves to sort of capture that transformation. Now

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Speaker 2: they just really need to start executing.

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Speaker 1: I think that we haven't spaken a lot about this

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Speaker 1: reporting season way being the media, perhaps you have no

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Speaker 1: l but it's credit quality, and we don't talk about

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Speaker 1: stuff when things looking pretty good. We only talk about

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Speaker 1: stuff when things are looking pretty bad. So is what

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Speaker 1: is it take on credit quality?

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Speaker 2: So with credit quality, I suppose there's a few factors

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Speaker 2: at play. One is just the existing books of the customers,

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Speaker 2: and of course they're taking on more business lending, and

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Speaker 2: so you see this growth in credit risk weighted assets

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Speaker 2: because they do attract a higher cost of capital than

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Speaker 2: your retail mortgage lending. We also are facing into slightly

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Speaker 2: unprecedented i'd say, geopolitical and trade tensions, and so with

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Speaker 2: that uncertainty looming, the banks are positioning themselves in terms

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Speaker 2: of provisions that they can be covered from that perspective.

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Speaker 2: But that said, I think you know, we see that

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Speaker 2: the capital position and the credit position still being very

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Speaker 2: very strong. App of course has their unquestionably strong stance

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Speaker 2: that they put on the banks and we see following

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Speaker 2: through with that with really strong capital positions.

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Speaker 1: So wrapping it up, you would say that the Australian

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Speaker 1: banking system is pretty sound at the moment. That's a

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Speaker 1: question my statement.

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Speaker 2: Yeah, No, definitely remains sound. Look, competition remains fierce, but

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Speaker 2: I think we all do want to see competition in

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Speaker 2: that sector. At the same time, we want to see

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Speaker 2: our banks performing well because many of us are shareholders

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Speaker 2: as well, so we want to see a very balanced

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Speaker 2: result in terms of measured growth, measured returns and sustainable

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Speaker 2: business for our banks.

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Speaker 1: No, well, thank you for talking to Fear and Greed.

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Speaker 2: Thanks for having me.

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Speaker 1: That was Noel Williams, PwC, Australia's at Banking and Capital

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Speaker 1: Markets Leader. If you've got something you'd like to know,

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Speaker 1: then send through your question on LinkedIn, Instagram, Facebook or

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Speaker 1: at Fearangreed dot com DODAU. I'm sure I all this

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Speaker 1: is Fear and Greed at q and Da,