Fast-rising spending by major banks on regulatory compliance and remediation could threaten their ability to counter digital challengers and second tier lenders.
That's the verdict of several leading advisers to the banking sector after Westpac closed out the 2018 profit report season.
"If the redirection of investment towards regulatory compliance continues over a protracted period and the majors are unable to maintain their historical levels of investment in digital and other competitive initiatives, it could impact on the level of innovation that Australian consumers and businesses are accustomed to," said KPMG partner, Hessel Verbeek.
"Trade-offs will inevitably need to be made."
While some commentators have downplayed the prospect of further remediation shocks in 2019, Ernst & Young's head of banking and capital markets, Tim Dring, suggests compliance and compensation burdens would continue to weigh on the major banks.
"Unsurprisingly, slowing revenue and upward cost pressures have seen cost-to-income ratios tick up as the banks continue balancing investment in digitisation and automation against rising remediation and compliance costs," he said.
"The past year has seen the banks making sizeable provisions for customer remediation programs.
"However, more provisions may be required and, as a result, profit growth may remain constrained in the near term."
The collective bottom line return of the majors in 2018 was a handsome A$29.5 billion, but it was 5.5 per cent lower than the previous year.
Despite a horrific year of record fines, prudential sanctions and material reputational damage, CBA retains its status as the country's best performing bank for shareholder returns.
While its golden era of world-leading returns might be ending, CBA still managed to churn out a return on equity of 14.1 per cent.
That easily eclipsed Westpac (13 per cent), NAB (11.7 per cent) and ANZ(9.8 per cent).
CBA also posted the sector's highest absolute cash profit of $9.2 billion - a cool billion dollars ahead of Westpac on $8.07 billion.
However, the cost blowouts that undermined CBA's profitability last year have resulted in Westpac wresting the mantle of Australia's most efficient bank.
The heavy cost pressures weighing the big banks lead to deterioration of cost-to-income ratios, but the rate of decline was comparatively modest at Westpac.
It ended the year with a sector-leading cost ratio of 43.8 per cent - untangling CBA's stranglehold on this productivity measure for almost two decades.
However, with its ratio sitting at 44.5 per cent, CBA remains more productive than ANZ (46.6 per cent) and NAB (51.9 per cent).
The decline in the major banks' overall performance is expected to continue in 2019 as funding headwinds gather and demand for housing finance slows further.
Westpac chief Brian Hartzer yesterday painted a cautious outlook for his bank's investors, saying that growth in housing credit would ease to around four per cent.
"We expect house prices to cool further, and investor demand to remain weak," he said.
E&Y's Dring said the mandated introduction of open banking next year would add new pressure on the major banks.
"In this environment, banks will need to bolster their financial performance by improving cost discipline, utilising technology to drive sustainable cost efficiencies and focusing on margin management to sustain revenues," he said.
"The challenge will be to do all this while also working to restore community trust and better align customer, shareholder, regulator and government expectations."