Banks’ cost-to-income ratios exploded in the March quarter, as big increases in bad debt charges and higher regulatory and IT spend weighed on modest income growth.
According to the latest APRA quarterly ADI performance statistics, the average cost-to-income ratio for the 147 banks and other authorised deposit-taking institutions overseen by the regulator rose to 63.4 per cent in the March quarter – the highest ever recorded in the data set (which goes back to 2004).
Over the year to March 2020 the average CTI was 55 per cent – up from 51.6 per cent in the year to March 2019.
Net interest income for the industry grew just 2.4 per cent to $79.2 per cent in the year to March, while total operating income was flat at $107 billion.
Operating expenses rose 6.1 per cent to $59.1 billion.
The overall charge for bad and doubtful debts in the December quarter was $5.4 billion, which was the worst result since the December quarter in 2008 when the financial crisis caused a spike in bad debts to $6.1 billion.
The industry’s return on equity fell to 9 per cent in the year to March – down from 11.1 per cent in the previous corresponding period. The ROE for credit unions and building societies was just 3.4 per cent.
One little-scrutinised ratio that is a staple of this APRA analysis portrays the industry’s profitability as even more feeble than the decline in ROE suggests.
The “profit margin” – in a sense normally applied to industrial companies rather than financiers – slumped to 10.0 per cent in the March quarter, from 32.6 per cent in the December quarter, which is around the level it’s been for the last five years. This ratio is the second-lowest ever recorded by APRA in a single quarter, the worst being 9.9 per cent in September 2009 as the Australian banking industry digested the bad debt bulge from the GFC.
On the positive side, APRA said ADIs are well-capitalised. The average total capital ratio was 15.7 per cent in the March quarter and the common equity tier 1 ratio was 11 per cent. APRA did note that some capital ratios fell during the quarter.
“Factors such as abrupt changes to capital markets, negative sentiment due to altered economic conditions and pressure to maintain dividend rates despite declining profitability will continue to place capital strain on ADIs,” APRA said.