Banks need new sources of earnings growth

he big banks may not be able to get much more mileage out of the cost cutting and reduction in bad debt charges that are driving their earnings growth.

KPMG's analysis of the banks' interim results shows there has been very little actual business growth. Average net interest income increased by just 1.6 per cent during the March 2013 half.

What drove the 11.7 per cent increase in net profit were both a 12.5 per cent reduction in the average impairment charge and a reduction in the average cost-to-income ratio from 47.5 to 44.7 per cent.

Bank chief executives expect demand for household and business credit to remain subdued, so the emphasis will remain on cutting costs and improving asset quality.

KPMG's head of financial services, Michelle Hinchliffe, said the banks' cost-to-income ratios are already in "world leading" class.

Hinchliffe said: "A ratio of less than 40 per cent would be very good. Maybe we would see it go below that."

ANZ's cost-to-income ratio is 45.2 per cent, Commonwealth Bank's is 45.1 per cent, NAB's is 45.8 per cent and Westpac's is 42.6 per cent.

"The banks' investment in technology might give them the capacity to make a step change in terms of costs. Over the next few years we will see how their operating models develop," Hinchliffe said.

KPMG's head of banking, Andrew Dickinson, said the position with bad debt charges was "about as good as it gets."

ANZ reduced its impairment charge by 10.9 per cent, Commonwealth Bank by 25 per cent, NAB by 25.5 per cent and Westpac by 27.5 per cent.

Dickinson said: "Charges were lower before the GFC, but that was off smaller balance sheets. They can't get much lower than they are now."