In a tumultuous economic environment of rising interest rates and inflationary pressures, many Australian households are left grappling with escalating living costs. For this same reason, our major banks may soon find themselves in the hot seat of having to explain yet another round of exceptional profit results.
Herein lies one of the banks’ biggest reputational hazards.
If record results from 2023 half-year reporting are an indication of full year profits, the challenge lies in the delicate art of disclosing strong results against a backdrop of growing customer resentment towards a rising cash and mortgage rate cycle.
Our banks are old hands at risk mitigation. But in reputation terms, the coming reporting season will require careful, strategic planning in order to contextualise margins and manage the expectations of customers. Profitability is always positive (especially for shareholders) until it isn’t!
Profits on Parade: A Look at the Most Striking Bank Earnings of the Half-Year
The performance of the banking sector is often seen as a barometer of broader economic conditions. Strong results from banks indicate a healthy and robust economy, while weak results suggest economic challenges or slowdown.
The big four banks reported cash profits of $17 billion for their first half, a 16.6% jump on profits from 1H22, and 22.9% on 2H22, according to KPMG.
The Commonwealth Bank reported a record half-year profit of A$5.15 billion, up 9 per cent while Westpac’s first-half profit jumped 22 per cent to A$4 billion. National Australia Bank (NAB) reported over A$4 billion profit, up 17 per cent for the half, and the Australia and New Zealand Banking Group (ANZ) recorded over $3.8 billion up 23 per cent compared to the previous first half.
What factors are helping to drive this solid set of half-year financial results?
The RBA’s 12 consecutive rate increases since May 2022 has played a significant role in boosting revenues and expanding the banks’ net interest margins (NIM).
The majors’ average NIM, an indicator of lending profitability, expanded 17 basis points to 1.88 per cent over the year to March due to their handling of rate changes, with less passed through to savers than mortgage borrowers.
As economic challenges compound and the burden on households intensifies, record profit margins can be out of touch to the consumer eye. Banks must consider the eroding impact on public trust and a media cycle that has the power to amplify negative perceptions.
Hitting the Plateau: Not if, but when
While big banks’ hot streak will promote some disdain amongst the public, it also raises one key question: how long can this margin benefit last?
Experts anticipate banking margins to compress as economic activity slows and competition across mortgages increases. Mortgages, for so long the cash cow in the sector, are far less profitable than they were. Despite offering cash back incentives and discounted rates, banks will see further increases in arrears rates in the months ahead as borrowers begin to bear the full effects of interest rate increases.
Funding costs are also anticipated to increase, and inflationary pressures, staff costs, technology (including cyber) and remediation costs will continue to drive up operating costs, according to KPMG insights.
This recent turbulence in the banking sector highlights the need for enhanced balance sheet and liquidity management. Australia’s major banks are now confronted with challenging decisions about how to balance profitability, customer sentiment, investment, and capital returns.
The Stakeholder Balancing Act
The reporting of record profits can fester negative sentiment perpetuated by a disconnect between the financial success of the institution, and the financial struggles faced by individuals in the broader community.
Our recommendation? Dial up your permission to show moral high ground credentials, increase focus on social good, and drill down on better customer services, improved products, and transparent leadership. Use a multi-faceted communications approach.
As we like to say at Madden – show, don’t tell!
It is vital to actively engage with customers to understand their needs and expectations, delivering clear and fair products and services. Empower individuals rather than exploit them.
Moreover, banks should make clear their impact beyond their own balance sheet. Whether it is investing in initiatives that benefit the local community or funding causes that support the values of society such as financial literacy, educational programs, philanthropy, or environmental sustainability, banks can contribute meaningfully and rebuild trust through their actions.
For example, during a time where the growth in cyber-crime is exponential, and consumers fear the safety of their data and savings, banks may choose to highlight their commitment to safeguarding assets by increasing investment in cybersecurity.
Finally, the winners in the reputation stakes during reporting season, will be those banking brands that evaluate their practices, policies, and decision-making processes to ensure alignment with the expectations of customer and shareholders, and are prepared with effective crisis management strategies.
Transparency and open communication become the pillars that support lasting relationships and help to build much-needed reputation capital!