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BankingMattersMajorBanksAnalysisMay2016www.
pwc.
com.
au2MajorBanksAnalysis–WrapupThemajorsfaceaconfluenceoffactorsthatwillshapethefutureofbanking:fundamentalforcesintheexternalenvironment,moderationinthetraditionaldriversofgrowthandanincreasinglybindingsetofconstraints–bothexternal(regulation,capital,funding)andinternal(legacy,culture).
Atthesametime,thesocialcontextischangingrapidlywithcultureandethicsinthespotlight,makingforaverychallengingoutlook.
FundamentallystrongCashearningsforthehalfwere$14.
9bn,adecreaseof2.
8%onpcpanddeclineof3.
6%onthepriorhalf.
ReturnonEquityof13.
7%wasdown245bpsonpcpand163bpsonthepriorhalf.
Thisrepresentsthesecondstraighthalfofearningsdeclineforthemajors.
Themajors'engineroomoflendingassetgrowthandstepstomanagemargindeclineshowtheimportanceofthedomesticretailandcorporatemarkettotheirresults.
Onaverage,NetInterestMargin(NIM)roseonlyslightlyto2.
04%,demonstratingtheimportanceofassetrepricinginlate2015anddepositrepricinggivenincreasedwholesalefundingcostsandinstitutionalbank/offshoremarginpressure.
Assetqualityremainedstronginthecoreofportfoliosbutbaddebtexpensewassignificantlyimpactedbyresource-relatedand'singlename'impairments.
Baddebtexpenseincreased$834million(m)onpcpand$520mhohto$2.
5bn.
$801moftheincreaserelatedtospecificallyidentifiedloans,withportfolioexpenserisingonly$33minlinewithassetgrowth.
TheincreasingweightofconstraintsTheresultsalsodemonstratetheincreasingweightofconstraintsfacingthebanksastheyattempttodriveandnavigatechangeandthecomplexityofdecisionsandstrategicchoicesrequiredasaresult.
PerhapstheclearestexampleofthiswasANZ's$717mofspecifiedadditionalcostitemsduringthehalf.
Theprofileoftheseitems(reassessmentofsoftwareusefullives,impairmentofoverseasinvestmentsandrestructuringcosts)areinstructiveofthecapitaloptimisationandinvestmentdecisionsfacingthemajors.
CapitalremainedanobviousfocusforallthemajorswithCET1rising45bpshohto10.
1%andwithapproximately$19.
8bnofCET1gainedthroughissuance,restructuringandorganicgenerationonpcp.
Theoutlookforfurtherincreasessuggeststhatcapitalrationingwillbeakeyfactorinprioritisingwhereandwhatis'core'tothelonger-termAustralianbankingfranchise.
Wehavealreadyseenhowthisistranslatingintodividendstances.
Thecostandinvestmentprofileofthebanksreflectsthechallengeofmaintainingalargebusinessinaheavilyregulatedindustrywhileinvestingtomeetrapidly-changingcustomerexpectations.
Theaverageexpense-to-incomeratioincreasedto44.
8%andhasbeenintherangeof43%-47%since2008,includingone-offs.
Thecostofmaintaininginfrastructure($0.
5bn)andregulatory/compliance($0.
6bn)remainasignificantproportion(51%)ofthe$2.
2bnoverallinvestmentspendandwillcontinuetofactorintoprioritisationdecisions.
Sixmonthsagowenotedthatwiththepaceoftechnologicalchange,paybackperiodsforinvestmentswereshortening.
Thefocusonexpensingpreviouslycapitalisedsoftwareandprojectsduringthelastfewperiodssupportsthisunequivocally.
ThehalfyearresultsshouldservetoremindusjusthowcomplicateditistobeaMajorBankinAustraliarightnow–anothersolidperformancebutwheretofromhere"Nobodysaiditwouldbeeasy.
2.
8%Cashearningsforthehalfdeclined2.
8%onthepriorcomparativeperiod(pcp)to$14.
9billion(bn)andfellby3.
6%onthepriorhalf(hoh).
Lendinggrowthandmarginmanagementinthehalfweremorethanoffsetbybaddebtexpenseincreases,andsomesignificantone-offs.
245bpsReturnonequity(RoE)fellfrom16.
2%to13.
7%onpcp,amovementof–245basispoints(bps).
Thismovementwasdrivenbyincreasedcapitalholdingsandthefallinearnings.
1bpNetinterestmargin(NIM)increasedslightlyby1bponpcpandhoh.
Thismaskssubstantialmovement,withthenegativeimpactofwholesalefundingandregulatorycostsoffsetbyretailrepricingofbothloansanddeposits.
49.
3%Baddebtexpense(BDE)roseby$834m(49.
3%)onpcpand$520m(25.
9%)hohdrivenbyahandfulofsinglenameexposures,particularlyintheresourcessector.
Underlyingassetqualitymetricsremainrelativelystablebutcreditqualityappearstobeataturningpoint.
180bpsExpense-to-incomeratioat44.
8%was180bpshigheronpcpand140bpshigherhoh.
Afteradjustingforone-offitems,expense-to-incomeincreased15bpsonpcp.
116bpsThecombinedCommonEquityTier1(CET1)ratioincreased116bpsto10.
1%onpcpand45bpshoh.
Thebanksgeneratedandissued$4.
5bnofCET1duringthehalfand$19.
8bnsincepcp.
3Creditgrowthhasbeenremarkablyresilientandtodateshowsnosignsofthefragilitymanyarepointingtogivenpoliticaluncertainty(e.
g.
potentialchangestonegativegearingrules)andincreasinglybearishcommentaryincertainareasoftheresidentialpropertymarketsuchasover-supplyinsomecapitalcities.
Housingcreditgrewat7.
2%perannum(p.
a.
)acrosstheindustrydespiteAPRAsucceedingincoolinginvestorlending(growingat7.
0%p.
a.
comparedto10.
2%sixmonthsago).
Businesscreditremainedatlevelsnotseensince2009withagrowthrateof6.
5%p.
a.
WeexpectthecostandprofileoffundingofthemajorstobecomeincreasinglycriticalastheimplementationoftheregulatoryNetStableFundingRatio(NSFR)from2018nears.
WhiletherearecomplexitiesintheapplicationofNSFR,weexpecttoseethisimpactbusinessmix,alengtheningofthewholesaledebtprofileand/orapreferencefor'stable'retaildepositfunding.
Givenfundingcosts(inclusiveofhedgingimpacts)contributedtoa4bpsreductioninmarginduringthehalfthismaybecomeafurtherweightonresultsorputpressureonthebankstorevisitassetpricing.
RedefiningexpectationsAttheverysametimeasthemajorsarefacedwiththeabovechallenges,theconceptofasocialcontractbetweenbanksandthepublicisbeingscrutinised.
RoyalCommissionornot,theresourcesdivertedtoanexternally-drivenchangethreatensthemajors'abilitytochoosetheirprioritiesinastrategic,methodicalwaywhichwouldquitepossiblyachievethesameoutcomes.
Banksoperateinauniqueandprivilegedintersectbetweenshareholders,customers,regulatorsandgovernmentandinabsoluteterms(particularlywhenwelookfurtherafield)hasservedeachofthesewellforsome100years.
Yetthecontextisnowshiftingdramaticallyascorporateandpoliticalexpectationsalignwiththebroadersocialnormsthatwearenowaccustomedto–transparency,therenewedprimacyoftheindividual,focusoncustomerexperience,andfair-dealing.
Thesearenotnewconceptsforbankingandpresentsignificantopportunitiesiftheyareembracedintherightway.
Theyareacceleratingachangeinfocusthatwasalreadyevident,enabledbyachangingtechnologyenvironment–ashiftofthecustomertothecentreandafocusontrust.
TherecentannouncementbytheAustralianBankers'Associationofafundamentalreview(includingremunerationandincentives)issignificantandunprecedentedinrecenthistory.
Theonusonthebanksistodeliverontheseexpectations.
Suchchangesarenotsimple,taketimeandmay,aswehavesaidforsometime,requirearecalibrationofreturnsforaperiod(possiblypermanently),butshouldleadactionandculturedowntherightpath.
TherecommendationsfromtheASICCapabilityReviewandsubsequentfundingannouncementsalsoservetofocusattentiononwhichpartsofthebroaderenvironmentneedtobestrengthenedtokeepourindustry"safe"andrestoretrust.
"…wesuggestthatthebankswillneedtobesimpler,smallerandmoredeeplyconnected.
Outlook–simpler,smallerandmoredeeplyconnectedOurperspective"Banking2020:thefutureofbankinginAustralia"takesalookattheexternalforcesthataredrivingchange,thechallengesthemajorsfaceastheyrespondandpresentsaviewonsixprioritiestobeconsidered.
Inbrief,wesuggestthatthebankswillneedtobesimpler,smallerandmoredeeplyconnected,embracingtheirregulatoryconstraintsforthesafetyandstewardshiptheyprovide.
Sixmonthsagoweexpectedtoseethebankscontinuetofocusonsteady,disciplinedreshapingandmakingtherightinvestmentsforanuncertainfuture.
Whilethishasbeenborneout,theneedforactionisaccelerating:Respondingproactivelytoquestionsonconductandculture,includingstrengthenedregulatorrelationshipstodriveoutcomesMaintainingsharpfocusoncreditperformance,businesssentimentandthebroadereconomyStrongeremphasisonstrategiccostmanagement,investmentprioritisationandmake-buydecisionsPreparingfortransitiontotheNetStableFundingRatioanditsconsequentialimpactonbusinessmixandasset/liabilitypricingSimplificationofcustomerexperiencesandofferings,digitisingandembracingfintechtoprovidecustomersmulti-channelexperiencesStrategiccapitalchoicesalignedtopotentialreturnswhileretainingoptionsinafluidworldBeingrealisticaboutthesustainableequityreturnsachievableandwarrantedinabetterprotected,changingbankingsector.
SimplerSmallerDeeplyconnected4Themajorbanksdeliveredcombinedcashearningsof$14.
9bn,down2.
8%comparedtothepriorcomparativeperiod(pcp)and3.
6%onthepriorhalf(hoh)–thesecondstraighthalfofdecliningcashearnings(prerestatements).
Afteradjustingforthereportedimpactofnon-recurringitems,cashearningsincreased2.
2%onpcpand1.
4%hoh.
Thegrowthonpcpwaslargelydrivenbybalancesheetgrowth,inparticularinAustralianretailbankingoperationsandbytightmarginmanagement.
Netinterestmarginsincreased1bpversuspcp.
Thebenefitofassetrepricingattheendof2015waslargelyoffsetbycompetitivepressuresintheinstitutional/offshorebusinesses,wholesalefundingcostincreasesandthemediumtermimpactofholdinghighercapitalandliquidassets.
FollowingtheReserveBank'seasingon3rdMay,itappearsthesewillbepressuredfurther.
Baddebtexpenseincreasedasignificant$834m(49.
3%)onpcpand$520m(25.
9%)hoh.
Almostallofthisincrease($801m)relatedtospecificexposures,particularlyinresource-relatedindustries,withportfolioscontinuingtoperformwellwithonlylimitedsignsofstress.
Whileconsensusappearstobeforadeteriorationinbroadercreditquality,itdoesnotappearthattheimpactofthiswillappearsoon.
Banks'costsremainwithinthe43%-47%expense-to-incomeratiorange.
Afteradjustingforlarger'one-off'expenses,thecombinedexpense-to-incomeratiowasup15bpsonpcpto43.
1%.
Withaflattonegativemarginoutlook,risingbaddebtexperienceandthependingimplementationoffurtherregulatorytightening(CapitalandNetStableFunding),thebanksarefacedwithachallengingoutlook.
Weexpectreturnsonequity(down245bpsagainstpcpand163bpshoh)tocontinuetheirdownwardtrajectoryasaresult.
OverviewFourmajorbankscombinedperformanceCashearnings–A$million1H162H151H16vs2H151H161H151H16vs1H15Netinterestincome30,18528,9614.
2%30,18528,1577.
2%Otherincome12,09312,499(3.
2%)12,09312,421(2.
6%)Totalincome42,27841,4602.
0%42,27840,5784.
2%Operatingexpense18,94517,9925.
3%18,94517,4478.
6%Coreearnings23,33323,468(0.
6%)23,33323,1310.
9%Baddebtexpense2,5242,00425.
9%2,5241,69049.
3%Taxexpense5,9215,998(1.
3%)5,9216,096(2.
9%)Outsideequityinterests2441(41.
5%)2452(53.
8%)Cashearnings14,86415,425(3.
6%)14,86415,293(2.
8%)Statutoryresults14,36416,671(13.
8%)14,36414,881(3.
5%)2.
8%CashearningsCashearningsdeclined2.
8%onthepcpand3.
6%hoh.
Thisreflectsasofteningoperatingenvironment,withbaddebtexpenserisingandmarginsremainingcompetitivedespiterepricingactivityinthehalf.
163bpsROEOverthehalf,ReturnonEquity(RoE)declined163bpsfrom15.
4%atfullyearto13.
7%.
Theimpactofcapitalincreasesoverthelastyear,combinedwithslowinggrowthmaysignalaresettingofRoEsforsometime.
5CreditAustraliandomesticcredithascontinuedtogrowstronglyrelativetorecentexperienceat6.
4%annualised(p.
a.
)toMarch2016(6.
7%p.
a.
atthefullyear)drivenbythesustainedgrowthinhousingcredit(7.
2%p.
a.
)andaresilientlyhighbusinesslendinggrowthrateof6.
5%p.
a.
Withthemajorsmaintainingmarketshareoftotallendingof72.
6%atMarch2016andSeptember2015,creditgrowthremainsthesignificantdriverofbankresults.
InvestorhousinglendinghascooledsharplyinresponsetotighteningcreditsettingsandrepricingandisnowwellwithinAPRA's10%growthbenchmarkat7%p.
a.
,downfrom10.
8%p.
a.
ayearagoand10.
2%p.
a.
sixmonthsago.
Thisisaremarkablechangeinsuchashortperiodoftime.
Owner-occupiedlendingpickeduptheslackhowever,growingat7.
2%p.
a.
annualisedtoMarch2016,higherthan5.
2%p.
a.
inMarch2015and5.
8%p.
a.
sixmonthsago.
Thesefiguresarereflectiveofsignificantreportingrestatementsbythemajorbanksinparticular.
Businesscreditgrowthhasmaintaineditsremarkabletrendofgrowthabove6%p.
a.
at6.
5%p.
a.
Giventhegeneraleconomiccommentary,thisappearstoindicateamoreconfidentbusinesssectorthanmanybelieve.
Theseremaingrowthlevelsnotseensince2009andhavenowbeenatorabove6%p.
a.
foroverayear.
BalancesheetdynamicsSource:RBA6FundingNotwithstandingrecentimprovementsinfundingprofile,themedium-termfundingoutlookfortheAustralianbanksremainschallenging.
TheimplementationoftheNetStableFundingRatio(NSFR)from2018willrequirethemajorstoensurea100%stabilitymatchovereach12monthperiodbetweenfundingandassets.
Whileitisdangeroustoover-simplifytheapplicationoftherules,thebanksarelikelytoneedtolengthentheirfundingprofiletomatchlonger-termassetsonthebalancesheet.
Inpracticethismaypresentchallengesasthesupplyandpricingoflonger-termwholesalefundingreducestheattractivenessofthisfundingsourcerelativetodeposits.
Inaddition,Australiahasarelativelysaturatedretaildepositmarket(ofwhichthemajorshold80.
7%share)whichhastraditionallyprovidedalowershareoffundingrelativetointernationalpeers.
WhiletherulesareyettobefinalisedtoallowfortheuniqueAustraliancontext,weregardtheNSFRasbeingassignificantaschangestothecapitalrequirementsforthebanks.
Eitherway,weconsiderithasthepotentialtoimpactmargins(eitherthroughwholesalefundingcostsordepositcompetition)andbalancesheetstructures(optimisingasset/liabilityprofiles).
Depositscontinuedtobetheprimaryfundingsourceforlendinggrowth,withtheloantodepositratioat68.
5%(69.
7%12monthsago).
Wholesalefundingcostshavedrivensomemargincompressioninthelastsixmonthsthoughtodatedepositmarginscontinuetoimproveforthebanks.
However,wehavenoticedsomeincreasedpricingcompetitionforretailtermdepositsinrecentmonths.
TheNSFRoutlookmayamplifythis.
Bankdepositsgrewat6.
9%p.
a.
lowerthanthe7.
2%p.
a.
inSeptember2015andMarch2015.
Depositmixcontinuedtomoveawayfromtermdeposits(declining1.
6%againstpcpat31March2016)favouringcalldepositswhichgrewby11.
6%p.
a.
,lowerthaninSeptember2015at15.
4%p.
a.
orayearagoat14.
0%p.
a.
Householddepositsgrewby10.
1%p.
a.
,inlinewithayearagobutlowerthanthe11.
0%p.
a.
seeninSeptember2015.
Businessdepositsincreased1.
9%p.
a.
,ascomparedto6.
6%p.
a.
atSeptember2015and8.
5%p.
a.
atMarch2015.
Superannuationdepositsgrewby7.
9%p.
a.
,incontrastto0.
7%p.
a.
atSeptember2015anda3.
8%p.
a.
contractionseenayearago.
CapitalThemajorbankshaveraisedorgeneratedaremarkable$19.
8bnofCommonEquityTier1(CET1)capitaloverthelastyearand$4.
5bnoverthehalf(netoffullyeardividends).
TheCombinedCET1capitalratioofthemajorswas10.
1%,anincreaseof116bpsonpcpand45bpshoh.
RoEhasfallenaccordingly(inadditiontotheimpactofsofteningresults)down245bpsonpcpand163bpshohat13.
7%.
Ingeneral,weseetheregulatorybiastowardshighercapitalfortheAustralianbanksstillhasawaytorun.
Havingbeeninexcessof15%since2010,ouroutlookisthatRoEislikelytosettleatlowerlevelsasthemajorsadjusttoachallengingmarketoutlook,particularlybaddebtsandmargincompression.
Thattrend,togetherwithlessscopeforprofitgrowth,willseethemarketrethinkthebenchmarkforAustralianbankequityreturns.
BalancesheetdynamicsAverageequityandreturnonequity025020015010050048122016%ReturnonequityAverageequity1H081H151H091H101H111H121H131H142H082H151H162H092H102H112H122H132H14A$bnSource:RBA,ABSAverageequityandreturnonequity025020015010050ReturnonequityAverageequity1H081H151H091H101H111H121H131H142H082H151H162H092H102H112H122H132H14A$bn7NetinterestincomeNetinterestincomegrew7.
2%onpcpand4.
2%hohreflectingtheresilienceofdomesticlendinganddepositgrowth,andamodestincreaseinnetinterestmargin.
Themarginbenefitofloananddepositrepricinginthehalfwasoffsetbydeclininginstitutionalbankingmargins,risingwholesalefundingcosts(whichhadbeenfallingforsometime),andthebroaderdragoflowerreturnassetsheldforliquiditypurposes.
Thebanks'combinednetinterestmarginincreasedto2.
04%,a1bpincrease(afterrestatements)from2.
03%ayearagoandhoh.
FollowingtherecentReserveBankeasing,theoutlookforfundingcosts(includingtheimpactoftheNSFR)andtheprospectoffurthercapitalactivity,weexpectmarginstoremainatoraroundtheselevelsintheshort-mediumterm.
Thereareanumberofoffsettingfactorsandtheoutlookisforfurthersoftening:Lending+1bppcp,+3bpshohThepositiveimpactofloanrepricinginthehalfwaspartlyoffsetbycompetitiveassetpricinginthecorporateandinstitutionalbusinesses.
Deposits+3bpspcp,+2bpshohAllbanksbenefitedfromlessintensecompetitionintermdepositswhencomparedto12monthsagoinparticular.
Wholesalefunding-1bppcp,-3bpshohWholesalefundingcoststurnedduringthehalffollowingaperiodofdecreasingcreditspreads.
Treasuryandmarkets-2bpspcp,-1bphohIncreasedholdingsoflowerearningliquidassetsandcapitalincreasesledtoadragonmargins.
RevenuesCombinednetinterestmargin2.
002.
252.
50%2.
052.
092.
142.
292.
282.
232.
252.
272.
202.
142.
132.
132.
082.
062.
032.
032.
041H081H151H091H101H111H121H131H142H082H151H162H092H102H112H122H132H148Revenuefrombankingfees($0.
5bn)declined1.
1%onpcp.
Feesandcommissionsdecreased1.
3%onpcp,drivenbyhigherlendingfeesoffsetbytheimpactoftheinterchangeresetinthehalf.
Tradingincomewasdown1.
2%onpcp.
Thestorydiffersfrombanktobank,withaccountingvaluationadjustmentsimpactingtheperiodtoperiodresult.
Thewealthmanagementbusinesseshadnegativeincomegrowthof1.
3%onpcpdrivenbygrowthinin-forcepremiumandimprovedlapseratesforinsuranceoffsetbytheimpactoflowerassetmarketsinthehalfandbusinesssales.
OtherincomeOtherincomecontinuedtocontribute28.
6%ofthebanks'totalincome,butdeclined2.
6%onpcpand3.
2%hoh,withbankingfeescontributing45%,wealthmanagement27%andtradingincome16%.
Thedeclineinbankingfeesof1.
1%onpcpandhohreflectsinparticularthecompetitivemarketininstitutionalbankingandtheimpactofinterchangefeechangesduringthehalf.
Theoutlookforbankingfeesislikelytocontinuedownwardasthetrendsofdigitisation,disruptionandcompetitionshownosignsofabating.
Tradingincometrendsdifferacrosseachbank.
Inaggregate,tradingincomedeclinedslightlyby$25m(1.
2%)onpcpbutincreased$316mhoh(duetolargehedge-relatedexpensesnotrecurring)to$2.
0bn.
Thebanksgenerallyexperiencedafavourablesales/tradingperformanceintheperiodandaccountingvaluationadjustments(CVAetc.
)continuetoimpactthetrend.
Wealthmanagementfeesdeclined1.
3%onpcpand1.
4%hoh.
Thepositiveimpactofgrowthinin-forcepremium,andimprovedlapseratesforinsurancewereoffsetbytheimpactoflowerassetmarketsandthesaleofwealthmanagementbusinessstakes.
Analysisofotheroperatingincome04268101214A$bn1H081H151H091H101H111H121H131H142H082H151H162H092H102H112H122H132H14TradingIncomeWealthManagementBankingfeesRevenues1.
1%1.
2%1.
3%9ExpensesCombinedexpense-to-incomeratio42.
044.
046.
048.
0%46.
2%45.
7%43.
6%44.
4%43.
8%45.
4%44.
3%44.
7%44.
4%44.
4%44.
3%44.
1%46.
7%43.
0%43.
4%44.
8%43.
0%1H082H081H092H091H102H101H112H111H122H121H132H131H142H141H152H151H16Totaloperatingexpensesincreasedby8.
6%onpcpand5.
3%hoh,comparedtoa3.
1%hohincreaseatthefullyear.
Thebankscombinedexpense-to-incomeratioforthehalfwas44.
8%,higherthan43.
0%atpcpandup140bpshoh.
Afteradjustingforlarger'one-off'items(ANZ'sspecifieditemsandNAB'sconductprovisions)expense-to-incomeincreased15bpsonpcpto43.
1%.
Expense-to-incomeratioshavebeeninthe43%-47%rangesince2008andareunlikelytofallsignificantlygiventheinvestmentprofileneededforfuturecustomerengagement.
Totalinvestmentspendrose2.
6%onpcpat$2.
2bn.
Asignificantproportionofthisspend(51.
1%forthehalf)iscommittedtoriskandcompliancecostsand'maintenance'ofexistingsystemsandinfrastructure.
Thisisdemonstrativeofthechallengeofbeingalargeregulatedinstitutioninafastmovingsector.
Afurtherbankreassessedtheusefullivesofsoftwareandtreatmentofprojectcostsduringtheperiod.
Thetrendtowardsacceleratingamortisationprofilesofinvestmentsappearswellfoundedgiventhepaceoftechnologicalchangeandreiteratesthecriticalityofinvestmentprioritisationdecisionsinthecurrentresultsoutlook.
Softwareamortisationwas$1.
4bnforthehalfcomparedto$0.
8bninpcpasaresult.
Thenumberoffulltimeequivalentstafffell1.
5%or2,576onpcpand1.
0%or1,609hoh,offsettingwageinflation.
Giventhetrendstowardsautomation,includingrobotics,weexpectthistocontinuetofall.
Personnelexpenseswere$10.
6bnforthehalf,uponly$460monpcpasaresult.
Staffcompensationis56.
0%oftotaloperatingexpenses.
Theinvestmentprioritisationdecisionsofthemajorsarecriticalastheyfaceanincreasinglyconstrainedanddisruptedfuturewithinaheavilyregulatedmarket.
$2.
2bnThebanksinvested$2.
2bnoverthehalf,with49.
0%beingspentontransformationandproductivityprojects.
Riskandcompliancespend($0.
6bn)increased23.
0%onpcpandremains30.
1%oftotalinvestmentspend.
10AssetqualityBaddebtexpenseincreasedby$834m(49.
3%)onpcpand$520m(25.
9%)hohduetotheimpairmentofanumberofsinglenameexposuresacrossthemajors.
Ofthe$834mofbaddebtexpenseincrease,$801mrelatedtoindividuallyidentifiedexposures,withportfolio(or'collective')baddebtexpenseincreasinglyonly$33m.
Thisisreflectiveofcontinuedbenignlossexperienceintheretailloanportfolios,withonlylimitedsignsofstressatpresent.
Impairedassetsaccountedfor0.
4%oftotalloansandadvancesatMarch2016downfrom0.
5%atthesametimelastyear.
Impairedfacilitiesroseby8.
5%hoh,mainlywithintheresourcesorconnectedsectors.
Non-performingloansorthose90dayspastduehaveremainedlowat0.
4%oftotalloansandadvances.
Itisimportanttoputallofthesefiguresinthecontextofthecreditcycleandlongertermaverages.
Sixmonthsagowecommentedthatfallsinbaddebtexpensehaddeliveredcombinedgrowthinthebanks'resultsof$10.
2bnsince2009andappearedtobebouncingonthebottomofthecreditcycle.
Overthelast20yearsonaveragebaddebtexpensehasbeen30bpsofloansandacceptances,comparedtoonly22bpsforthelastthreeyears.
Onthatbasis,itisreasonabletoassumeintimethatbaddebtswilltrendhigher,butgivendomesticeconomicindicators,theinterestrateenvironmentandcurrentportfolioperformance,wedonotseeasignificantriskofthishappeningsoon.
21bpsAt21bps,baddebtexpenseasapercentageofloansandacceptancesroseforthesecondconsecutivehalf.
96.
0%ofthisincreasewasattributabletoindividuallyidentifiedloans,predominantlyintheresourcesector.
11ANZCBANAB(iii)WBC6mthsMar-166mthsSep-156mthsMar-156mthsDec-156mthsJun-156mthsDec-146mthsMar-166mthsSep-156mthsMar-156mthsMar-166mthsSep-156mthsMar-15BalancesheetTotalassets895,278889,900860,087903,075873,446850,714868,730955,052958,587831,760812,156795,961Riskweightedassets388,335401,937386,863392,662368,721353,048361,433399,758393,238363,248358,580346,823Grossloansandacceptances565,451573,741561,907675,728646,172627,698532,313584,147573,490644,054626,344608,264Assetquality&provisioningGrossimpairedassets2,8832,7192,7082,7882,8553,3602,1742,0502,5582,4871,8952,148Netimpairedassets1,6451,6581,5941,7561,8292,1161,5721,3791,6511,3021,0181,121Grossimpairedassetsasa%ofgrossloansandacceptances0.
51%0.
47%0.
48%0.
41%0.
44%0.
54%0.
41%0.
35%0.
45%0.
39%0.
30%0.
35%Individuallyassessedprovisions1,2381,0611,1149008791,116596637872952669806Individuallyassessedprovisionsasa%ofimpairedassets42.
94%39.
0%41.
1%32.
28%30.
8%33.
2%27.
41%31.
1%34.
1%38.
28%35.
3%37.
5%Collectiveprovisions2,8622,9562,9142,7632,7392,7442,4532,8832,8712,7172,6632,699Collectiveprovisionsasa%ofnon-housingloans&acceptances1.
14%1.
08%1.
07%1.
24%1.
24%1.
24%1.
07%1.
19%1.
18%1.
27%1.
26%1.
32%Totalprovisions4,1004,0174,0283,6633,6183,8603,0493,5203,7433,6693,3323,505Totalprovisionasa%ofgrossloans&acceptances0.
73%0.
70%0.
72%0.
54%0.
56%0.
61%0.
57%0.
60%0.
65%0.
57%0.
53%0.
58%Profit&lossanalysis(i)Netinterestincome7,5687,4787,1388,3647,8907,8756,6006,2886,2107,6537,3056,934Otherincome2,7482,8643,0574,0563,9613,8522,3232,4592,4262,9663,2153,086Operatingexpenses5,4794,7754,6035,2165,0794,9143,8313,7573,6764,4194,3814,254Coreearnings4,8375,5675,5927,2046,7726,8135,0924,9904,9606,2006,1395,766Baddebtexpense918695510564548440375349399667412341Profitbeforetax3,9194,8725,0826,6406,2246,3734,7174,6414,5615,5335,7275,425Incometaxexpense1,1331,3261,3981,8251,6991,7401,3431,3121,3451,6201,6611,613Minorityinterest46811111000092434Cashearnings2,7823,5403,6764,8044,5144,6233,3743,3293,2163,9044,0423,778Statutoryresults(ii)2,7383,9873,5064,6184,5284,5353,3073,7533,2313,7014,4033,609KeydataOtheroperatingincomeasa%oftotalincome26.
64%27.
69%29.
99%32.
66%33.
42%32.
85%26.
03%28.
11%28.
09%27.
93%30.
56%30.
80%Interestspread1.
80%1.
82%1.
82%1.
94%1.
93%1.
95%1.
76%1.
71%1.
73%1.
95%1.
94%1.
87%Interestmargin2.
01%2.
04%2.
04%2.
06%2.
06%2.
11%1.
93%1.
88%1.
92%2.
14%2.
11%2.
05%Expense/incomeratio(asreportedratio)53.
10%46.
20%45.
10%42.
20%43.
30%42.
20%41.
60%41.
50%41.
00%41.
61%41.
64%42.
46%Totalnumberoffulltimeequivalentstaff48,89650,15251,24345,22145,94844,52035,52034,58234,56834,67735,24136,559Operatingcostsperemployee(dollars)–annualised221,266190,088181,272232,987224,566221,229218,521215,690214,101254,207244,067233,313Returnonaverageequity(asreported)9.
70%13.
30%14.
70%17.
20%17.
80%18.
60%14.
10%14.
30%15.
80%14.
15%15.
87%15.
81%Returnonaverageassets(underlyingcash)0.
62%0.
81%0.
89%1.
06%1.
04%1.
13%0.
76%0.
75%0.
75%0.
94%1.
00%0.
96%CapitalratiosCommonequity9.
80%9.
60%8.
70%10.
20%9.
10%9.
20%9.
69%10.
24%8.
87%10.
50%9.
50%8.
80%Tier111.
60%11.
30%10.
60%12.
20%11.
20%11.
60%11.
77%12.
44%11.
13%12.
10%11.
40%10.
30%Tier2(netofdeductions)2.
10%2.
00%2.
00%1.
90%1.
50%1.
10%1.
49%1.
70%1.
68%1.
90%1.
90%1.
80%Total13.
70%13.
30%12.
60%14.
10%12.
70%12.
70%13.
26%14.
15%12.
81%14.
00%13.
30%12.
10%LendingandfundingratiosGrossloans&acceptances/totalassets63.
16%64.
47%65.
33%74.
83%73.
98%73.
78%61.
16%61.
16%59.
83%77.
43%77.
12%76.
42%Housingloansgrossloans&acceptances55.
41%52.
50%51.
47%64.
70%65.
44%65.
53%58.
54%58.
54%57.
60%66.
76%66.
13%69.
93%Deposits(excludeCDs)/grossloans86.
52%84.
21%85.
79%74.
08%73.
84%72.
87%70.
76%71.
71%72.
68%68.
62%68.
20%69.
09%Deposits(excludeCDs)/totalliabilities58.
32%57.
90%59.
66%59.
37%58.
15%57.
20%46.
01%46.
57%45.
87%57.
12%56.
33%56.
36%Keybankingstatistics–Halfyear2016AllfiguresinAUDmillionunlessotherwiseindicated(i)Inarrivingat"cashearnings",incomeandexpensesexcludecertainnon-cashitems.
Non-cashitemsincludeacquisitionrelatedadjustments,impactofhedgeaccountingandrevaluationoftreasurysharesandotheritemsreportedbythebanks.
Somecomponentsofincomeandexpenseshavebeenreclassifiedtoimprovecomparabilitybetweenbanks.
(ii)Statutoryresultasreportedbythebanks,unadjusted.
(iii)NAB'sunderlyingcashearningsaftertaxareshownbeforedistributionstoholdersofNationalSecurities–1H16($64m)2H15($66m)and1H15($109m),NABonlyreportsanexpense-to-incomeratioforitsbankingoperations.
NABalsorestated2015resultstoreflectdiscontinuedoperations,theClydesdaleBankIPO,andadjustmentstohownetinterestmarginiscalculated.
12ContactsJulieCoatesFinancialServicesLeader0282662006julie.
coates@pwc.
comHughHarleyFinancialServices–GlobalEmergingMarketsLeader0282665746hugh.
harley@pwc.
comSamGarlandBanking&CapitalMarkets0282663029sam.
garland@pwc.
com2016PricewaterhouseCoopers.
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