Australia's second tier banks are facing similar cost pressures to those of the four major banks, but so far have not seen the same declines in their net interest margins, according to analysis by Deloitte.
In a side bar to its report on the Big Four banks' profits, Deloitte observed that, similar to their Big Four rivals, the largest regional banks – that is, Bendigo and Adelaide Bank, Suncorp's Banking and Wealth division, and Bank of Queensland – all experienced declines in their FY20 cash profits.
Suncorp’s Banking and Wealth division had the largest decline of the second tier banks to A$242 million, which was a 33.5 per cent decrease compared to FY19, according to this analysis.
Unlike the major banks, however, the NIMs across the three second tier banks have not experienced large declines:
• BOQ’s NIM declined slightly by two basis points to 1.93 per cent;
• Suncorp’s margin increased by four basis points to 1.94 per cent; and
• despite Bendigo Bank’s NIM remaining flat, its net interest income increased by 2.9 per cent to $1.34 billion as a result of increased lending activity, although slightly offset by a decline in fee and commission income.
Bendigo Bank also saw the largest increase in its cost-to-income ratio to 62.7 per cent, primarily due to a 9.4 per cent increase in personnel expenses.
The large increase is a result of $10.8 million redundancy costs and support for its 7.9 per cent residential lending growth compared to FY19.
Despite a 320 basis point increase in BOQ’s cost-to-income ratio, it has the best efficiency ratio of the second tier banks (54.2 per cent), Deloitte has asserted.
Looking across the second tier banks, the increases in cost to income ratios were primarily driven by increases in personnel and technology expenses.
Given the impact of COVID-19, the second tier banks have increased provisions to recognise the potential future impact on their lending assets:
• Suncorp’s impairment expense as a percentage of gross loans and advances was the lowest of the three banks in FY19 at 0.02 per cent, but increased by 27 basis points in FY20.
• BOQ and Bendigo Bank had increases of 22 basis points and 18 basis points to 0.37 per cent and 0.26 per cent respectively.
Despite asset quality deterioration in FY20, impairments as a percentage of GLA remained near historically low levels. Collective provisions as a percentage of credit risk weighted assets increased significantly across the three banks by an average of 43 basis points, with BOQ having the highest ratio at 1.04 per cent.
"All three banks continue to have sufficient capital during these current economic conditions, with each increasing their CET1 ratio to between 9.25 per cent and 9.78 per cent," Deloitte reported.
Bendigo Bank and BOQ’s respective 33 basis points and 74 basis points CET1 ratio increases were supported by capital raisings via institutional placements and share purchase plans.