The cost story and the operational disability embedded in the quarterly APRA analysis of the industry is dire.
Banks threw people and consultants at their five star risk management stress as the COVID-19 pandemic began to smash business services and social cohesion in every form 19 months ago.
And of course the entire industry has hired and hired and hired (and retrained and redeployed) to staff up contact centres, specialist hardship teams and all the apparatus of mitigating a confounding economic shock.
APRA’s quarterly authorised deposit-taking institution performance statistics for June 2021, as ever, panders to tales of endurance, but these are misleading.
Over the financial year to June 2021 Australia’s banks and credit unions seemingly played the profit maximising game artfully.
Industry post-tax profit increased to A$32.3 billion this year, from $26.2 billion in FY2020.
The increase, APRA explained, was largely driven by a material reduction (down $10.4 billion) in charges for bad or doubtful debts, as banks have been releasing provisions “to reflect the better than previously-expected economic outlook over the past three quarters.”
The return on assets was a more ordinary story in a sector awash with liquidity, the most beautifully low interest rates since Marx and a startled banking guardian class unwilling to do the right thing and turn the credit taps up.
The banking sector's ROA in FY2021 at 0.6 per cent is almost a ‘so what?’ rise from 0.5 per cent in FY2020.
Return on equity, the APRA version, lifted to 9.2 per cent in 2021 from 7.9 per cent the year before.
The payroll line is the compromising highlight in this APRA assessment of Australian banking.
The ratio of personnel costs to operating expenses (a metric often of little note) ballooned over Covid.
The payroll ratio in the June 2021 quarter was 55.5 per cent, a whopping rise from 41.2 per cent in March 2020 (and this may be an outlier).
Personnel costs on this ratio have been worse – much worse – in the recent history of Australian banking.
The expense to assets ratio, APRA report this on delay. For the big banks it is 1.1 per cent, in line with recent years.
Gross loans and advances increased by 1.9 per cent to $3.5 trillion over the June 2021 quarter, APRA said, “due to an increase in both housing and business loans.
“The notable loan growth is reflective of the bullish housing market and strong economic recovery in the quarter, prior to the current wave of COVID-19 restrictions.”
Total deposits grew strongly in the June quarter, increasing to a new historical high level of $3.4 trillion as at June 2021.
APRA said that “at-call and on-demand deposits have increased at the expense of term deposits, given the narrower-than-usual pricing differential between these products in the current low rate environment.
Long term borrowings have been consistently declining since March 2020.
“The funding environment in the June 2021 quarter was favourable to ADIs,” APRA noted, with strong deposit growth and the RBA support (via the Term Funding Facility) reducing ADIs’ need to raise funding from other sources.