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Speaker 1: Welcome to the Fearing Greed Business Interview. I'm Suan Almam.

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Speaker 1: Australia's banks remained pretty resilient in the face of global uncertainty.

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Speaker 1: In tension, the major banks had a combined fifteen point

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Speaker 1: three billion dollars in profits for their mid year earnings,

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Speaker 1: a relatively steady result that competition in the market may

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Speaker 1: be squeezing margins. Noel Williams is PwC, Australia's banking Capital

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Speaker 1: Markets leader. Noel, Welcome to Fear and Greed.

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Speaker 2: Hi, Sean, thanks so much for having me.

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Speaker 1: So we've had three big banks in the last week.

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Speaker 1: We had Commonwealth Bank, which has a different n GAR

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Speaker 1: date three months ago. What is the prognosis for Australian

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Speaker 1: banks broadly.

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Speaker 2: Well interestingly, Sean, the prognosis is actually quite flat when

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Speaker 2: we look at the key ratios that we look to

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Speaker 2: see how our banks are turning in their overall health.

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Speaker 2: But you know, just saying that they're flat is actually

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Speaker 2: not telling the full story and the immense effort that

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Speaker 2: has gone into just maintaining study state.

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Speaker 1: So let's go bit by bit on the revenue sign.

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Speaker 1: Different banks obviously focus on different things, but it's mostly

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Speaker 1: mortgages and business lending. A lot of focus on business lending.

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Speaker 1: In fact, they all seem to be saying that we're

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Speaker 1: going to become the best business bank lender because that

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Speaker 1: has a greater margin. Yep, what are you seeing on

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Speaker 1: that revenue side? Top line?

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Speaker 2: Yeah, so top line revenue is up, and what we're

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Speaker 2: seeing is that there has been a real focus on

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Speaker 2: the mortgages side to chase better margin, and that's a

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Speaker 2: shift of proprietary lending, so to try to bring back

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Speaker 2: some of that margin that was lost in that commodity

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Speaker 2: trap of the mortgage head on head competition that we

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Speaker 2: saw over the last sort of eighteen to twenty four months.

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Speaker 2: And then on the business side, yes, everyone has pivoted

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Speaker 2: towards business and that is to try to find some

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Speaker 2: of that better margin. But of course as everyone pivots

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Speaker 2: towards that and competition increases, we are starting to see

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Speaker 2: maybe some early signs of price competition in that segment

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Speaker 2: as well. Interestingly, I think in the business segment as well,

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Speaker 2: we're seeing that system growth outpaced the majors and so

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Speaker 2: there is competition coming from the non majors as well

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Speaker 2: in that segment.

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Speaker 1: So just explain that, And we've had private credit people

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Speaker 1: come onto the show and talk about how they've been

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Speaker 1: able to step in, not always because of the bank's

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Speaker 1: individual banks faults, but sometimes it's appa the regulator has

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Speaker 1: made rules that makes it difficult for the banks, etc.

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Speaker 1: But just explain how that business banking segment is expanding,

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Speaker 1: at least in terms of providers.

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Speaker 2: Yeah, so when we talk about system growth, we're actually

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Speaker 2: talking about the upper regulated system itself, so that would

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Speaker 2: be your non major banks. And we've certainly seen a

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Speaker 2: lot of focus from the entire banking sector into business

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Speaker 2: bank and I think what we're seeing in the non

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Speaker 2: majors category is a focus onto particular sub segments of

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Speaker 2: the business industry, so into SME or even specific segments

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Speaker 2: of SME. So it's fragmenting that business market, and everyone's

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Speaker 2: trying to get their niche and their offerings to really

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Speaker 2: attract particular segments where they think there might be opportunities

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Speaker 2: for growth. Now, the private credit side of that equation

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Speaker 2: that you're referring to, that's not even measured in the

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Speaker 2: statistics that we look at from the system. So let's

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Speaker 2: again bring in additional competition into that space. But it's

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Speaker 2: also filling a need where are stringent macroprudential settings that

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Speaker 2: we have in Australia which gives us this very unquestionably

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Speaker 2: strong capital base which is serving us well. We can

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Speaker 2: chat on that later, but because we have that, the

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Speaker 2: private credit space does fill a bit of that gap

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Speaker 2: to balance out the supply and demand around the lending

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Speaker 2: needs of those that don't meet those credit hurdles to

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Speaker 2: get through with the banking sector itself, OK.

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Speaker 1: I mean, just to finalize that point without talking about

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Speaker 1: any specific bank, it's interesting that the non mag is

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Speaker 1: seem to be doing a really good job in business

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Speaker 1: lending when the mages are all attacking that as a

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Speaker 1: way to improve their profit margins.

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Speaker 2: Yeah. Correct. I suppose it's probably just a factor of

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Speaker 2: when everyone's focused on the same segment that everyone's trying

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Speaker 2: to find their niche to get into. I think if

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Speaker 2: you're smaller, you can probably be a little more nimble

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Speaker 2: and a little more targeted because you're not facing into

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Speaker 2: the sort of scale of growth that the majors would

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Speaker 2: be seeking. But certainly the majors all grew in that

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Speaker 2: area as well, so you know, you can see those

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Speaker 2: strategies starting to come through, and I think the real

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Speaker 2: challenge now going forward is where we talk about that

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Speaker 2: they need to strike this balance. Is that trying to

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Speaker 2: avoid getting into that price based competition that happen on

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Speaker 2: the mortgages front and business certainly does give you more

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Speaker 2: opportunity to differentiate in terms of the services sector focus,

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Speaker 2: et cetera that you can focus in on. And so

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Speaker 2: we would expect that all of the banks will be

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Speaker 2: starting to think about their strategies in that space and

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Speaker 2: how they will differentiate themselves.

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Speaker 1: So the big banks, one of the big advantages is

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Speaker 1: that when they want to lend out money, they actually

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Speaker 1: get and get it from the deposit pace. From your work,

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Speaker 1: it looks as if it's a pretty good time for

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Speaker 1: banks in terms of deposits.

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Speaker 2: Yes, deposits are at at least in the last decade

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Speaker 2: high as a proportion of overall funding. So that has

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Speaker 2: reduced the reliance on the offshore wholesale funding segment. And

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Speaker 2: you know, it's really that domestic deposit base that the

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Speaker 2: banks are chasing after to get into place. Now. I

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Speaker 2: think if you think that through, it's not that surprising

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Speaker 2: because interest rates are also quite persistently high and so

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Speaker 2: deposits are a nice place to park your money and

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Speaker 2: in terms of asset class, it's a very very safe

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Speaker 2: investment to have your money into the deposits. So whether

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Speaker 2: that will remain or not as a funding mix as

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Speaker 2: interest rates come off, we have yet to see. But

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Speaker 2: you know, for this half, we're at an all time

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Speaker 2: high in the last decade for the deposits.

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Speaker 1: And on the cost site, PwC highlights the technology spend

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Speaker 1: and Westpac, for example, has a massive technology spend to

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Speaker 1: bring its takes takes together. Again, without commenting on any

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Speaker 1: bank specifically, they all do seem to be putting money

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Speaker 1: into that side of their business.

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Speaker 2: Yeah, yeah, So without naming any specific strategies towards that,

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Speaker 2: but I think you see it in the commentary that

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Speaker 2: each of the banks has their own approach to technology

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Speaker 2: and investment there. But what is consistent is that the

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Speaker 2: spending technology and personnel is increasing across all of them.

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Speaker 2: And look, it's on surprise and given the age of

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Speaker 2: legacy systems that are being run focused on operational resilience,

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Speaker 2: the need to reduce some of that key person risk

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Speaker 2: just to shore up operations and then wanting to really

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Speaker 2: simplify and streamline so that that cost base can eventually

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Speaker 2: be brought down and a real focus onto the front

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Speaker 2: end and the customer and what that innovation can look like.

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Speaker 1: Stay with me, Noel, we'll be back in a minute.

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Speaker 1: I'm talking to Noel Williams from PwC. Okay. So we

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Speaker 1: kind of went through the ticks and tax of the

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Speaker 1: results before the break a few things. So I want

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Speaker 1: to talk about where do banks grow? Where is the

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Speaker 1: growth trajectory for a big full bank.

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Speaker 2: Yeah, it's interesting, Sean when we look at our banks

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Speaker 2: compared to peers around the world, and this is I

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Speaker 2: suppose one of the challenges for our banks when they're

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Speaker 2: looking for those growth areas. They're less diversified than global peers.

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Speaker 2: Right after the Royal Commission Wealth and Advice arms were

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Speaker 2: divested and so you're left with a very standard set

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Speaker 2: of products in terms of lending and deposits. And so

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Speaker 2: what our banks will be thinking about is how do

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Speaker 2: you grow in those traditional channels mortgages. We're seeing a

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Speaker 2: real focus on growing and proprietary channels, so moving away

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Speaker 2: from brokers and climb backs some margin there. And then

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Speaker 2: as you look across the broader set of products, and

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Speaker 2: also looking at the innovation agendas, they will be thinking

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Speaker 2: about how they can innovate to grow certain customer cohorts

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Speaker 2: and segments.

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Speaker 1: That's a good segue into some of the work PwC

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Speaker 1: has done on the different customer segments. Your analysis kind

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Speaker 1: of picks up the gen Z and millennials of fifty

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Speaker 1: percent more likely to consider non banks to provide banking services.

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Speaker 1: That must put pressure on the big banks. Yeah.

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Speaker 2: Again, it's a bit of a balance in terms of

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Speaker 2: how do the banks focus, and there's a few factors

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Speaker 2: that go into that, right. So that stat that you

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Speaker 2: quoted there was from our Global Consumer Preferences Survey and

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Speaker 2: Banking and I think that's a really interesting start. When

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Speaker 2: you look at the younger demographics and they have a

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Speaker 2: higher propensity to switch banks, they have a higher propensity

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Speaker 2: to consider non banks for banking services, and so they

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Speaker 2: really need to be thinking around that next generation of

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Speaker 2: customers and how do you get them now, make them

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Speaker 2: sticky and offering them those adjunct services that they're saying

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Speaker 2: that they would like to see from their banking service providers.

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Speaker 2: On the balancing side of that, you actually have quite

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Speaker 2: an aging demographic in Australia and that trend of aging

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Speaker 2: demographics is going to forecast to continue quite steadily for

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Speaker 2: the foreseeable future. So as we have a cohort of

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Speaker 2: the population moving into the retirement phase, the superannuation releases

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Speaker 2: actually become quite an attractive potential source of deposit funding.

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Speaker 2: So again our major banks looking at how in balance

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Speaker 2: and evating for the younger demographic and yet retaining their

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Speaker 2: more traditional legacy customers and meeting their needs in order

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Speaker 2: to get that funding balance and mix right.

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Speaker 1: One final question. We always talk about Australia's banks being

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Speaker 1: safe for the top seven companies in the country, for

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Speaker 1: the top eight, I think now are the big four

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Speaker 1: banks incredibly well capitalized? Why are Australian banks in playing

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Speaker 1: terms so not allowed to use the word capitalized in

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Speaker 1: playing English? Why are Australia's banks so highly regarded basil three?

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Speaker 2: And that's a bit of a term, isn't it. Yeah, yeah, sorry,

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Speaker 2: So Australia is actually world leading in terms of our

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Speaker 2: macroprudential settings around capital that must be held by our banks.

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Speaker 2: And so what that means is that for every dollar

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Speaker 2: lent out, our banks are holding a very high ratio

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Speaker 2: and so therefore they're seen as incredibly safe in that

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Speaker 2: space because there is a buffer there to absorb potential

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Speaker 2: losses if there was a downturn. And you actually see

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Speaker 2: that come through with investment trends very recently since Liberation

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Speaker 2: Day that there have been overseas investment and flows into

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Speaker 2: Australian banks, and so it's really just reinforcing that the

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Speaker 2: banks are seen as a really safe investment banks in

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Speaker 2: Australia specifically, and that those macropodential settings are actually serving

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Speaker 2: us really well during these really volatile times.

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Speaker 1: Now, apart from the Fries macro prudential setting, I think

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Speaker 1: you did a pretty good job. So basically they're regulator

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Speaker 1: forces the banks to hold money aside, enough money aside

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Speaker 1: to actually hold them in pretty good state.

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Speaker 2: Yeap, and ours hold more than the others around the world.

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Speaker 1: Great, Noill, thank you for talking to Fear and Greed.

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Speaker 2: Thanks so much.

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Speaker 1: That was now well Williams PWTZ Banking and Capital Markets Leader.

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Speaker 1: This is the Fear and Greed Business Interview. Join us

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Speaker 1: every morning for the full episode of Fear and Greed

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Speaker 1: Daily business years for people who make their own decisions.

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Speaker 1: I'm Shane Elma joy your day,