Despite the turbulent and challenging operating environment and subdued economic climate outlined above, the major banks produced a resilient set of results at 1H17, with earnings growth of 3.8% against 1H16, but decreasing 4.6% against 2H16.
The contrast in the headline earnings trend between these two periods reflects the manner in which the operating environment in these two six-month reporting periods impacted the major banks to varying extents, together with bank-specific circumstances playing out in the results.
Given the depressed levels of business confidence that persisted over 1H17 across the retail and corporate sectors, the major banks’ aggregate credit growth was muted for the period. Gross loans and advances stayed largely flat against both 2H16 and 1H16, showing marginal growth of 0.9% and 0.7% respectively.
The credit experience of the major banks, meanwhile, continued to reflect the disciplined approach to origination that they have adopted consistently over the years. Non-performing loans (NPLs) fell moderately by 0.5% against 1H16, but ticked slightly upwards by 1.9% against 2H16.
Balance sheet provisions followed this directional trend, falling marginally by 0.6% against 1H16, while showing slight growth of 0.9% against 2H16. The total credit coverage ratio similarly followed these trends, coming in at 66.5% at 1H17 (67.6% at 2H16 and 67% at 1H16).
Net interest income (NII)
The net interest income line also reflected the challenges of the current operating environment and difficult macros of the current period, staying largely flat against 2H16 and showing moderate growth of 1,8% against 1H16.
On a positive note, the major banks continue to maintain a healthy net interest margin, which showed a 3bps expansion against 1H16, while expanding more moderately (5bps) against 2H16. This continues to reflect the banks’ efforts to appropriately price for risk in their portfolios, and is an admirable achievement in the current climate. Funding margins of the major banks have shared some level of widening as lending slowed.
Non-interest revenue (NIR)
The major banks’ NIR continues to be primarily supported by growth in fee and commission income, which represents 71% of total NIR revenue for 1H17 (73% at 2H16, 70% at 1H16). Combined annualised NIR growth was 1.7% in 1H17 against 1H16 (3.7% against 2H16), largely on the back of growth in fees and commissions of 2.4%.
In a challenging environment that saw many retail banking customers transact within value bundles, this growth is a positive sign of healthy transaction volumes and may indicate that the banks’ focus on optimising and digitising electronic channels over previous periods is paying dividends.
The combined cost-to-income ratio deteriorated to 55.6% as at 1H17 (2H16: 55.4%, and 1H16: 54.8%). The major banks continue to focus on managing discretionary spend, while managing structural cost programmes to realise efficiency gains that can be invested in growth initiatives.
This is the ninth consecutive reporting period in which the cost-to-income ratio remained in the 54%-56% range, highlighting the challenge to further contain costs in the current environment.
Return on equity
Combined ROE grew by 25bps against 1H16, but contracted 73bps against 2H16, further evidence of the earnings challenge experienced by the major banks over the first six months of 2017. As always, the ROE experience of individual banks is reflective of different experiences their lending portfolios demonstrate at different points in the credit cycle.
In the current reporting period in particular, the banks took deliberate actions regarding their levels of credit provisioning to reflect their specific experiences of the current credit cycle.