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.
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
