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.
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
