EY’s recent analysis looked at the 2020 full-year results of Australia’s big four banks. The research found combined cash earnings decreased to $17.38 billion, representing a fall of 36.5 per cent from the same time last year.
Meanwhile, total impairment charges across the big four banks rose to $11.9 billion before tax, up by $7.48 billion from the 2019 full year, the analysis showed.
“The major banks continue to face earnings headwinds, but currently, their financial position remains sound due to strong capital and liquidity levels — with resilience further supported by the policy measures put in place to address COVID-19 stresses,” EY Oceania banking and capital markets leader Tim Dring said on the findings.
“However, it really is a waiting game and the banks are bracing for impact, with the full effects of the economic downturn on asset quality yet to play out. While the banks are preparing for portfolio distress, the true scale won’t be revealed until forbearance programs and income support measures draw to a planned close in the first quarter of the 2021 calendar year.”
Rather than V-shaped, Mr Dring said it’s becoming “increasingly likely” that there will be a “prolonged global economic recovery period, particularly with the resurgence of further waves of the COVID-19 pandemic currently impacting the US and European economies”.
“In the face of this highly uncertain market outlook, the banks’ top priorities are managing credit risk and continuing the journey of process simplification and digitisation as a mechanism for controlling costs,” Mr Dring said.
“At this stage, the full impact of the economic downturn on asset quality for the Australian banks remains impossible to estimate, with loan repayment deferrals, government income support and the temporary easing of loan loss recognition requirements obscuring the full extent of asset quality deterioration.
“So far, realised losses and non-performing loans (NPLs) have remained low; however, banks are anticipating higher loan losses and defaults as these relief measures are unwound and unemployment rises to its expected peak around June 2021.
“Business insolvencies are also running at a much lower rate than usual, supported by the temporary relief measures introduced at the onset of the pandemic. This is prompting concern over a possible jump in failed businesses once support measures are removed, with hospitality, arts and recreation and retail among the higher-risk industries.”
Looking ahead, Mr Dring said a key test will be how the banks position themselves to combat the age of the coronavirus and beyond.
“The Australian banking sector remains resilient, but risks are clearly elevated in this challenging operating environment, brought about by the pandemic. The economic downturn, dampened credit demand and significant asset quality risks are all weighing on the banks’ future revenues, profits and returns,” he said.
“However, as we transition into the recovery phase, banks can still position themselves for future growth. To help rebuild profitability in the wake of the COVID-19 crisis, we expect to see banks focused on improving their digital capabilities and developing more agile operating models that will enable them to deliver a better customer experience and create capacity to invest in further transformation.”