What lies ahead for the Australian retail banking market

Managing costs and building profitable revenue are strategic priorities for Australian banks as they face operational challenges and increasing regulatory requirements. There is no doubt that better managing governance, supervision, resilience and technology remain critical foci for the sector.

Cost-to-income ratios for the major banks are around 45-46%, (significantly lower than some of their global peers’ 60-70%). However, resource and regulatory pressures contribute significantly to costs, with regulatory spend exceeding $1.3bn p.a. for the big four banks.

The challenge of increasing cost of regulation, be it capital or conduct, will have a big influence on what will become the new ‘business as usual’ banking norm. This means resetting both behavioural and investors’ expectations of banking returns.

Media and political attention in Australia is following a similar pattern to that in overseas markets, where the magnitude of the cost of regulation, remediation and conduct risk issues, in prolonged falling lower interest rate environments, have had far more significant impact on returns.

More positively the speed of technological and effective implementation has ramped up. Transforming the business model to deliver productivity savings is the only sustainable option, given the key pressures presented by market conditions. The opportunities to enhance efficiency are a key focus to deliver sustainable long term returns.

The turning tide in a tale of two halves

According to the latest Reserve Bank credit data, growth over the year to October 2016 for the retail banking sector overall, decreased to 5.3 % compared with 6.7% in 12 months to October 2015.

Credit demand has eased in all sectors, and the year-on-year growth in mortgage balances fell 100 basis points. Overall total mortgage balances grew at 6.4% in the 12 months to September. Whereas personal credit balances fell by 1.1% in the 12 months to October 2016. However settlements, remained at around 15%-16%, which is not unexpected in a falling interest rate environment.

This slower growth is potentially an early sign of what the future looks like in a highly regulated and continuing low interest rate environment.

The recent reporting season (full year results from CBA and trading updates from the other three major banks) highlight the fact that the tide is now slowly turning with many headwinds ahead for Australian banks including:

  • slowing growth in traditional markets
  • increasing regulatory requirements (higher capital and funding requirements)
  • conduct risk and remediation matters
  • declining trust
  • increasing competition and consumer confidence in non-traditional lenders
  • early signs of turning asset quality cycle.

Moody’s recently placed Australian major banks on a negative outlook: “Expectation of a more challenging operating environment for banks in Australia for the remainder of 2016 and beyond, which could  lead to a deterioration in their profit growth and asset quality, as well as an increase in their sensitivity to external shocks.”

Looking to the future?

Interest rates

Pressure on margins is here to stay as the Reserve Bank of Australia (RBA) is likely to adapt a multi-pronged stimulus approach if economic conditions deteriorate further and the AUD remains abnormally high.

Glen Stevens (immediate past governor of the RBA): “Although we have not implemented ‘unconventional policies’, we nonetheless have interest rates at levels lower than any of us have seen before in our lifetimes. Moreover, the ‘return to normal’ at the global level looks like being a very, very slow process. And normal is a different place now.

In Australia, things have been really good for a long period of time – with 25 years of continuous growth according to the Australian Bureau of Statistics (ABS)[1]. But the market is changing. Subdued growth is unlikely to be a short term thing and in the slow-growth environment there will be an even greater focus on getting costs under control.

While it’s still not a train smash, each piece of news and information continues to paint a picture that the market is, ‘getting a little bit worse’ and confirms there’s not a lot of retail banking growth.


Banks have to maintain ‘unquestionably strong’ capital levels, and at the same time comply with ever increasing international regulatory requirements. In order to do that, they need to attract and service their large capital bases, which will only happen if they maintain strong levels of profits.

The market is now thinking that CET1 ratios of the major banks are heading to a minimum of 10%. On that basis are the average ROEs of 14-15% sustainable?


More than ever there is likely to be a continuous focus on intangibles such as conduct and social licence.

Non-financial risks relating to misconduct have a huge down side, including significant reputational risk and banks have no other option but to manage these risks efficiently.

It is becoming widely acknowledged that conduct is one of the biggest risks facing the retail banking industry today. More than ever conduct and values are absolutely critical in any business. Not only in Australia but around the world the banking industry is in the spotlight and being asked to change. The experience of banks overseas continues to have an impact on the Australian market, including the regulators recent focus on sales practices.

The Forbes Deloitte biennial risk management survey of the world’s leading 300 financial services organisations show that reputation – and in particular social media – has increased the bias of perception in information. It has helped engender a lack of trust in the sector with a focus on the power of social networks to influence human nature. Positively this perception-based understanding continues to increase the demand for transparency and simplicity.

Emotively there are strong links between a return to customer transparency and mutuality. A lack of shareholder pressure inherently removes the counter balance and mitigates the incentive of not doing the right thing (even when no one is looking).

This means the banks have to pedal harder on efficiency and productivity to address historically high levels of investor expectations.


How to bank the balance between shareholder returns and customer best interests is leading banks both in Australia and overseas towards the opportunities available from technology platforms to deliver:

  • Further standardisation
  • Automation
  • Robotic processes
  • Data driven positive assurance.

The ever thinning bar on which to balance banking

Retail banking is definitely facing a difficult task. The major challenge has always been to find the balance between shareholder returns and customer best interests.

However, what has changed is the environment and conditions in market which make the commercial aspiration more difficult. Lower growth, paying for the safety of capital and a high bar of positive customer outcomes and endemic good conduct, that is tested, reportable, supervised and dynamic even when no one is looking, are all adding to the complexity and the constantly slimming margins.

The trade-offs are becoming acute and demanding increasing levels of senior executive and board attention. On a transactional basis this is highlighted by ‘out of cycle’ rate rises and the need to reprice mortgages – a difficult public perception to manage.

In order to offset these challenges we expect the speed at which the opportunities with technology and transparency of information can be embedded in the system, will pick up pace.

Key issues and opportunities facing the Australian Retail Banking sector will be covered in the 2017 AFR Banking & Wealth Summit in April. Find out more here.



[1] Table 2, http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Sep%202016?OpenDocument

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