Finance in Australia 2022

Industry Report

Finance in Australia

The RBA has increased the cash rate target three times over the four months through August 2022 to limit spending and tame inflation.

Rising interest rates are likely to increase the cost of borrowing and subdue business confidence, while simultaneously taming inflation.

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EXECUTIVE SUMMARY

• The Finance subdivision covers firms that provide banking and finance and investment trusts in Australia. The most significant industries in the Finance subdivision are domestic banks, foreign banks, non depository financiers and financial asset investors. The subdivision excludes auxiliary finance and insurance service providers.

• The Finance subdivision's operating environment has been challenging over the past five years, due to falling interest rates. Residential property prices have risen over the period, supporting demand for mortgages. However, volatile business confidence has limited growth in capital expenditure from the private sector and overall demand from commercial clients.

• Revenue is expected to decline at an annualised 2.4% over the five years through 2022, to $185.1 billion, however is anticipated to rise by 2.1% in 2022, as most operators have wound down deferrals on loan repayments that were offered at the height of the COVID 19 pandemic.

• The RBA's efforts to stimulate economic growth have helped drive down funding costs to support profitability for lenders. However, more recent higher capital requirements and remediation costs for the major banks following the Financial Services Royal Commission have weighed on net interest margins and caused subdivision profit margins to fall.

• In addition, operators made provisions to cover the cost of the COVID-19 pandemic due to the financial hardship faced by borrowers. The major players have also offloaded or are seeking to sell their less profitable ventures overseas, along with businesses generating lower returns (such as wealth management and life insurance businesses), to refocus on core banking operations.

OUTLOOK 2022 - 2027

• The industry’s outlook is forecast to be positive over the next five years, with revenue forecast to grow at an annualised 7.8% over the five years through 2027, to $269.5 billion. The major banks account for a large proportion of the subdivision, and their performance will heavily influence movements in the subdivision's revenue.

• The economy's recovery from the COVID-19 pandemic, business confidence, consumer sentiment, property market conditions and global economic growth will also influence the subdivision's performance. Interest rates are projected to rise over the next five years, helping banks capitalise on the loan books built up over the past five years. However, the subdivision faces challenges in higher capital requirements and tighter lending standards.

Source: IBISWorld | Finance in Australia, March 2022

General Insurance Australia

Industry Report

General Insurance in Australia

The industry is forecast to improve over the next five years, as local and global economies are projected to record stronger growth. Interest rates are expected to rise too, which will likely boost investment income for insurers.

The industry includes general insurers and reinsurers. General insurers underwrite insurance policies to cover individuals and businesses' financial loss associated with property, casualty, liability and other risks. Underwriting involves assuming risks and assigning premiums. Reinsurers assume all or part of the risk associated with existing insurance policies underwritten by other insurers.

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The occurrence of natural disasters has resulted in a rise in the number of claims, forcing industry operators to raise premiums. The COVID-19 pandemic has also led to a shift in types of insurance claims.

DEMAND DETERMINANTS

OVERALL ECONOMIC ACTIVITY | CONSUMER WEALTH | DEMOGRAPHICS | BUSINESS AND CONSUMER CONFIDENCE | RISK PROFILES | PREMIUMS

Demand for products from the General Insurance industry is affected by many factors including: overall economic activity, consumer wealth, demographics, business and consumer confidence, risk profiles and premiums. Wider economic activity affects insurance demand through exposure to risk. Higher employment leads to more risk associated with workers' compensation. A strong economy and labour market increases disposable income, driving household consumption and wealth and therefore, generates greater demand for insurance. Similarly, any decrease in overall economic activity can reduce household coverage, as wealth and consumer expenditure decline. Demographics also influence insurance demand, with individuals' coverage and expenditure increasing as they age. Premiums affect coverage levels and the volume of policies offered. Premium increases can constrain demand and reduce coverage as consumers self-insure when insurance costs outweigh potential payout gains.

OUTLOOK 2021 - 2026

Industry revenue is projected to grow over the next 5 years; driven by the anticipated economic recovery from the recession which is likely to generate demand for general insurance products, providing insurers with the opportunity to grow premium revenue. Additionally, forecasted growth in the cash rate and bond yields will enable operators to generate higher investment returns. Adversely, strong industry competition is forecast to put pressure on profit margins as well as the effects of the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services which is to come into effect as at 1 July 2021.

The major players are projected to continue to dominate the industry, intensifying price competition and increasing policy coverage. Strong competition is likely to impact Small/Medium Enterprises the most. Large insurers hold more capital, so they can bear higher pricing risks and are better placed to add further coverage to existing policies. Online aggregators have driven a rise in competition, as greater price transparency has generated additional pressure on firms to compete on price.

Larger insurers have a history of aggressive expansion through M&A, and further activity is projected which is expected to reduced industry enterprise and establishment numbers. Employment numbers are also anticipated to drop marginally, as key players continue to acquire smaller operators.

External competition is likely to increase as non-traditional insurers and large technology companies, such as Google, Facebook and Amazon, are anticipated to push into the industry. These companies have been making inroads into online user experience and customisation, and have demonstrated an ability to quickly enter and disrupt new markets. However, the pandemic has forced insurers to accelerate the adoption of digital technology.

The industry will likely face some technological disruption. While technological developments could increase competition within the industry, it also creates opportunities for industry players to to expand, given the growing popularity of cloud computing and business being conducted online.

Cyber insurance is becoming an increasingly popular area of general insurance, which typically covers losses from data theft and other IT-related risks. This market remains largely untapped and presents an opportunity for operators, given the complexity and risks of the cyber landscape.

Source: IBISWorld | General Insurance in Australia, March 2021

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Finance in Australia

Industry Report

Finance in Australia

Profitability is expected to rise over the long term with less pressure on net interest margins.

The primary activities of this industry are: building society operation, financial asset investment service provision, credit union operation, banking service provision, money market dealing, and non-depository financing.

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OVERVIEW

The Finance industry has had a challenging operating environment over the past five years, due to falling interest rates and declining private capital expenditure.

Ongoing macro-economic and geopolitical changes have led to uncertainty surrounding the global economy and financial system over the past five years. Slowdowns in several economies across the globe and concerns about Chinese economic sustainability have affected Australia's economic performance.

Domestically, declining private capital expenditure has led to lower demand for credit, and a downturn in the residential property market in 2018-19 put further pressure on industry revenue. Falling interest rates have been the key reason for revenue declines. Due to the economic impact of COVID-19 revenue is forceast to drop 4.6% in 2020.

The big four banks account for c.60% of total subdivision revenue in the current year. Hence, the finance industry’s performance reflects the performance of national banks, which is linked to the cash rate and market interest rates. To stimulate the economy, the RBA has lowered the cash rate to historic lows. The RBA has made five cuts to the cash rate since June 2019, and further quantitative easing may occur as the effects of COVID-19 persist.

Demand for credit has varied across different parts of the economy. In the retail market, the large value and volume of mortgages has significantly increased industry’s assets. While the commercial market has been reluctant to make significant investments, contributing to weakened demand for credit.

The banks have started offloading divisions with lower returns, and exiting businesses abroad and streamlining operations to focus on core banking operations in Australia. Changes in the regulatory landscape, have prompted this renewed focus for the banks. These events have led to the major banks selling or seeking to exit their wealth management and life insurance divisions due to weaker returns and high regulatory costs for these businesses. The four major banks have also sought to reduce their branch numbers as banking and financial services are increasingly delivered through digital channels. This trend has led to subdivision employment numbers falling over the past five years, despite enterprise numbers increasing.

OUTLOOK 2020 - 2025

Revenue is forecast to grow by 4.3% over the five years through 2025, to $241.1B. Enterprise numbers are forecast to rise due to growth in the number of mutual organisations, neobanks and foreign banks. Foreign banks, along with the emergence of neobanks and other financial technology providers, are expected to contribute to growth in wage costs.

Profitability is anticipated to rise slightly, as lenders recover from COVID-19 related credit impairments, and pressure is reduced on net interest margins. The big four banks' strategic focus is expected to continue shifting due to potential developments across several of their key products and markets, including residential property lending, and divesting wealth management and insurance segments. The banks have streamlined their operations and focused on core banking operations. This shift in focus, and a projected rise in interest rates and lending activity post COVID-19 is expected to support recovery in the lending sector. Capital expenditure by the private sector is also anticipated to rise.

APRA has introduced a range of measures to ensure banks and other financial institutions are more resilient and compliant, with more reforms expected over the next five years. The Basel III reforms were set to come into effect in January 2022, but will be delayed due to COVID-19 as regulators relax requirements to promote credit availability and lending in the economy.

The big four banks currently hold a large portion of the residential mortgage, consumer and business lending markets, emphasizing the financial system's reliance on major banks. APRA amplified the capital requirements on residential mortgage exposure for major banks and those using the internal ratings-based approach in July 2015. Capital adequacy will likely increase further as APRA seeks to bring capital benchmarks to an indisputably strong level, while also making changes to risk weights to discourage banks from issuing higher risk loans.

Post the findings concluded by the Financial Services Royal Commission, consequences are anticipated to continue weighing on revenue growth. Lending activity and credit growth may slow due to changes to the mortgage broking landscape, while financial institutions will likely implement tighter lending standards.

Tighter lending standards are forecast to affect retail consumers through mortgage lending, and loans provided to small and medium businesses.

Source: IBISWorld | Finance in Australia, July 2020

Online Shopping in Australia

Industry Report

Online Shopping in Australia

Online retailers are forecast to increasingly expand into other sales channels over the next five years.

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OVERVIEW

Online retailing has flourished due to changing consumer attitudes over the past five years. Declining discretionary incomes has resulted in consumers fostering a bargain hunting trend, increasing the demand for online shopping.

Improvements and increases in internet connectivity has helped drive industry growth. Online retailers have attracted greater demand as consumers have become more tech savvy and computer literate. Improvements in the security and reliability of online payment systems have changed perceptions of ecommerce, transforming it into a credible shopping medium.

Online retailers allow consumers to search, compare and evaluate options from a variety of providers. Trust, reputation, warranties and add-on services increasingly influence consumers. Furthermore, offering a high standard of customer service on shopping websites is a key issue for the industry. Consumers are demanding greater transparency regarding delivery charges and enhanced information about products.

Industry operators face intense competition from traditional bricks-and-mortar retailers, department stores and international online operators.

Consumers can only undertake online shopping through devices connected to the internet, which means that digital technology is an essential aspect of the industry. The rapidly increasing use of smartphones and tablets has prompted the development of mobile-optimised websites and applications. Mobile commerce enables retailers to connect and interact with customers through social media, messaging and marketplace platforms.

OUTLOOK 2020 - 2025

Consumers seeking convenience and competitive prices are expected to drive demand for online goods and services. Industry firms are anticipated to reach broader audiences due to faster broadband speeds, rising internet penetration and increased transaction security.

The industry is projected to benefit from further technological change. Operators are anticipated to use advancements in computer programs and website design to allow consumers to virtually try on clothing, footwear and accessories. These advancements may include using cameras to take precise body measurements.

New payment platforms such as Afterpay have gained significant momentum and are forecast to continue driving sales. These new payment platforms have gained popularity among younger consumers.

Online retailers are anticipated to increasingly expand into other sales channels. Pure-play online retailers are increasingly using multiple channels to engage and connect with customers, and some are opening flagship bricks-and-mortar stores that typically act as showrooms for their products. Hybrid retail models are projected to grow in popularity, increasingly blurring the line between traditional and online retail.

Industry players are expected to continue facing external competition from department stores, traditional retailers and foreign websites.

Industry profit margins are forecast to rise as operators focus on reducing overhead costs, improving supply chain processes and inventory management, and upgrading warehouse and fulfilment distribution.

Online retailers are likely to increase their operational efficiency as they become more established in their respective markets. The nature of online retail typically allows firms to boost sales volumes as online traffic increases, without an equivalent increase in staff. However, the industry is projected to rely on highly skilled labour to retain market share in an increasingly competitive environment, increasing wage costs over the next five years.

Online enterprise numbers are projected to grow slightly over the next five years as companies increase their online operations and bricks-and-mortar retailers develop online platforms. However, firms are likely to increasingly outsource their IT operations, limiting growth in employment over the period.

Source: IBIS World | Online Shopping  in Australia, May 2020
Note: The industry does not include the sale of goods or services by agents that do not take ownership of the goods and services, or the sale of goods by individuals.