KPMG and EY highlight Australia's big four banks must balance ongoing compliance costs with continued spending in technology or face being left behind when it comes to innovation.
In their post FY18 analysis of Australian bank results, KPMG and EY point to several compliance and technology headwinds facing the sector and suggest cost discipline will be a major focus. It means more restructures and simplifications.
KPMG partner, banking strategy, Hessel Verbeek said not only have various compliance and remediation costs translated into higher cost-to-income ratios, "the majors' investment spend in risk and compliance projects is also up strongly and in most cases investments on growth initiatives has decreased in a relative sense."
"If this redirection of investment towards regulatory compliance continues over a protracted period of time 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 from our banking industry. Trade-offs will inevitably need to be made," Verbeek said.
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The headline cash earnings of Australia's big four banks dropped to $29.49 billion after tax for the 2018 full year, a decrease of 5.5% from the same period last year. Both accounting firms acknowledge this is due to the sector dealing with slower revenue momentum and increased customer remediation and compliance costs.
EY Oceania banking and capital markets leader Tim Dring said the results also come at a time when the banks' profits and returns are increasingly being squeezed by the slowing housing market, reduced borrowing capacity, customer remediation programs and higher costs.
"Australian banks are facing significant challenges, both financial and non-financial, with the Royal Commission, regulatory pressures and a rapidly evolving competitive environment all pointing to ongoing sector disruption," Dring said.
"Unsurprisingly, slowing revenue and upward cost pressures have seen cost-to-income ratios tick up (to an average of 46.7%), as the banks continue balancing investment in digitalisation and automation against rising remediation and compliance costs.
"Other external drivers, such as real time payments, comprehensive credit reporting and open banking, are also pushing up expenses. APRA has recently raised concerns that the banks are not investing enough in maintain existing core technology, and this increased scrutiny may prompt a renewed focus on re-platforming for some banks."
Both KPMG and EY suggest policies aimed to increase innovation and competition is starting affect the position of major banks, especially in non-bank lending.