Two of the big banks, Westpac and ANZ, outlined ambitious cost-cutting programs in last month’s interim reports but Macquarie Securities has cast doubt on these plans, saying none of the big banks have delivered on these programs in the past and there is no reason to think they will succeed on this occasion.
Westpac’s plan is to cut operating expenses by around 40 per cent over the next three years. In 2019/20 the bank’s operating expenses were A$12.7 billion ($10.2 billion excluding notable items). Over the next three years it plans to bring its expense line down to $8 billion.
Westpac chief executive Peter King said the bank would reach its target by reducing the cost of notable items, such as litigation expenses and customer remediation, selling the non-core businesses that have been put into its specialist business division, continuing with its program of business simplification and having a smaller head office. Branch and staff numbers will fall.
ANZ said it would cut $900 million of expenses over the next two years, with the savings coming from the implementation of automation and digital banking services.
In a report headed “Promises, Promises”, Macquarie said it expects the majority of benefits to be competed away.
“Over the past five years investors have seen every major bank announce a major cost-out program with an ambitious target, which has largely failed to materialise,” the report said.
“Over the last five years banks claimed that they achieved significant productivity savings (ANZ has not historically disclosed its productivity benefits). However, inflation, investment in compliance and higher investment spend fully offset these benefits and banks’ ongoing expenses (excluding productivity benefits) grew by around 3 to 6 per cent, which has materially exceeded inflation.”
Macquarie has calculated that over the three years to the end of the 2019/20 financial year, Westpac’s expense base increased by 14 per cent, CBA’s by 10 per cent, NAB’s by 10 per cent and ANZ’s by just 2 per cent.
In recent years banks’ expenses have been impacted by a significant increase in compliance-related spend, a higher level of amortisation and expensing of projects, as well as remediation activity and fines.
“While we anticipate the level of remediation activity to normalise, we expect compliance related spend to remain elevated,” the report said.
Macquarie said it has more confidence in Commonwealth Bank and ANZ achieving productivity benefits ahead of NAB and Westpac.
“ANZ’s high pre-FY16 expense growth had been a significant driver in its ability to contain expenses better than peers in subsequent years. However, we believe it will be more challenging for ANZ to materially outperform peers on costs without damaging the franchise in the future.
“We expect NAB to continue investing and improving systems and believe management’s expectations of declining investment spend are unrealistic.
“CBA is the only major that appears to be taking a different tack, having walked away from its medium-term cost target of around $9.5 billion. As a result, we expect CBA’s higher cost growth is likely to be supported by a more resilient revenue base, and in the event of revenue