November 7, 2019 / 5:04 AM / 11 days ago

Australia's 'Big Four' banks post second year of lower returns

SYDNEY (Reuters) - Australia’s four major banks reported a second consecutive year of lower returns, dragged down by hefty customer compensation bills following mis-selling scandals, greater competition and a low credit growth environment.

FILE PHOTO: The National Australia Bank Logo is seen on a branch in central Sydney, Australia, February 8, 2018. REUTERS/Daniel Munoz/File Photo

National Australia Bank Ltd (NAB.AX), the last of the so-called “Big Four” to report annual earnings, on Thursday posted a 10.6% drop in profit, cut its final dividend and said it planned to raise about A$1.55 billion in new shares to help meet new regulatory capital ratios.

NAB and its peers Westpac Banking Corp (WBC.AX), Australia and New Zealand Banking Group (ANZ.AX) and Commonwealth Bank of Australia (CBA.AX) were once the envy of banks around the world because of their consistently high profits and returns to shareholders.

However, they are struggling to deal with record low interest rates and the fallout of a government-backed inquiry that found widespread misconduct in the financial sector - both on the bottom-line and in the eyes of the public.

The quartet posted a collective A$26.9 billion in cash profits for fiscal 2020, down 7.8%, according to EY data. The average return on equity fell 1 percentage point to 10.9%, the lowest in at least two decades.

A major reason for the downturn was a collective A$5.7 billion remediation bill, to compensate customers for practices including billing them for wealth management advice they did not receive and incorrectly charging bank fees.

“The risk of further costs arising from penalties and fines or class action lawsuits continues to be high,” Fitch Ratings Agency said in a statement.

NAB was the most precariously placed to meet a new core capital ratio of 10.5% by Jan. 1 - at 10.38% it is the only one of the Big Four currently below that level.

Its decision to raise capital via a partially underwritten dividend reinvestment plan followed Westpac’s announcement earlier this week of a A$2.5 billion capital issue, the largest raising by one of the Big Four since 2015.

The weaker earnings have impeded the banks’ ability to maintain an attractive payout, with NAB following Westpac in cutting its final dividend, from A$0.99 to A$0.83 per share. ANZ cut the franking credit on its dividend.

Analysts highlighted the challenging outlook amid ultra-low interest rates and slower housing credit growth.

“We expect to see earnings downgrades across the market,” Macquarie analysts said in a note.

BONUSES CUT

NAB was singled out by last year’s Royal Commission inquiry into the banking sector for an apparent unwillingness by its executives to accept responsibility for past wrongs, prompting the resignation of former Chief Executive Andrew Thorburn and Chairman Ken Henry.

On Thursday it scrapped short term bonuses for its whole executive suite, worth a maximum A$14.4 million, including acting CEO and incoming chairman Philip Chronican.

Westpac similarly axed its CEO’s short-term bonus, while ANZ stripped 14% of its boss’ bonus.

NAB reported full-year cash earnings of A$5.10 billion ($3.51 billion), below a Reuters’ average analyst estimate of A$5.15 billion and last year’s A$5.70 billion. The net interest margin (NIM), the difference between what a bank pays to borrow money and what it charges customers for loans, declined 7 basis points to 1.78%. Recent central bank rate cuts would lower the fiscal 2020 NIM by a further 3 basis points.

“This has been a challenging period for the industry and, of course, for NAB in particular,” Chronican said.

Investors are hoping former Royal Bank of Scotland (RBS.L) boss Ross McEwan will be able to turn things around and win back customer trust when he takes the top job at NAB in December.

Reporting by Paulina Duran; editing by Jane Wardell

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