Australian banks have achieved another robust full-year performance despite declining cash profits and net interest margins in the second half of 2023 (H2 2023). Strong competition and increasing funding costs have counteracted the advantages of higher interest rates, yet the banks have sustained growth throughout the year.

Net revenues for the reported period surged by 10.86% to reach USD 62.88 billion, propelled by an impressive 13.67% increase in net interest income from USD 46 billion to USD 52.3 billion.

Future revenue and earnings may experience moderation due to several factors:

1. While home loan competition intensity has reduced anticipated credit contraction in mortgage and business sectors is expected to impact the business.
2. An inflation-driven surge in operating expenses, including staff, technology, and cybersecurity costs, poses challenges.
3. Increased interest rates and inflation are expected to exert pressure on households and businesses, potentially leading to a modest decrease in asset quality.
4. Fierce competition for mortgages and deposits has constrained the peak growth of Net Interest Margins (NIM), leading to a decline across all banks in H2 2023 compared to H1 2023.

In response, major Australian banks have begun to strategically prioritize the enhancement of customer experiences and digital capabilities. Their focus includes ongoing investments to streamline customer journeys, bolster digital banking channels, refine touchpoints, and implement app enhancements. These initiatives are crucial to adapt to the evolving banking landscape and meet modern consumers’ heightened expectations. I also found that Australian banks are taking a steadfast approach in adopting AI capabilities and three leading banks have adopted AI in major forms.

AI initiatives in FY 2023

Recognizing its growing importance, Australian banks are in the early stages of AI adoption. In FY 2023, ANZ, NAB and CBA have made the following investments:

1. ANZ invests in an AI-driven capability that targets the detection of accounts used in scams to minimize fraud prevention.
2. NAB leverages AI for business automation and digitization, resulting in a substantial USD 266 million in productivity benefits.
3. CBA employs an AI-powered Customer Engagement Engine, providing personalized digital experiences such as Bill Sense and Benefits Finder.

The Southeast Asian banking sector's widespread adoption of AI in employee productivity, conversational AI, and customer engagement highlights a significant opportunity for Australian banks to explore similar avenues.

Future outlook for FY 2024

In 2024, Australia's banks anticipate a decrease in net income. This is attributed to the conclusion of a pandemic-era subsidized funding program, leading to intensified competition for deposits. We anticipate a decline in net interest margins (NIM) due to rising funding costs and deposit rates. Increased pressure on profits from funding mix costs and heightened competition are likely to squeeze NIMs. This is likely to impact earnings from interest income and the banks will route their earnings towards fee-based income.

To know more about the performance of Australian banks and their latest initiatives to take place in 2024, click here.