RETURNS from Australia’s biggest banks are heading towards the single digits for the first time in more than two decades, pushed down by record low interest rates and increased competition from smaller lenders and foreign players, analysts said ahead of second-half earnings reports.

The so called “Big Four,” once the envy of banks around the world because of their high returns, are widely expected to report a second consecutive fall in full-year cash earnings, weighed down by one-off customer remediation charges totaling almost A$5 billion (US$3.41 billion).

Commonwealth Bank of Australia already reported a second consecutive annual profit fall, missing expectations as rising costs and falling rates ate into margins, and the other three majors are expected to post similar results in the coming days.

“They had a really good period post the GFC (global financial crisis) from a credit growth and competition perspective, combined with an incredibly strong housing market, but they are facing a whole range of headwinds now,” said Andy Forster, Senior Investment Officer at Argo Investments, who holds positions in all four major banks.

Ultra low interest rates, higher capital requirements, and competition in a low credit growth environment are all expected to push returns lower in coming years, Forster added.

Banks have delivered ROEs (Return on Equity) averaging over 15 percent in the years that followed the global financial crisis and currently yield returns of about 12 percent.

Analysts expect Australia and New Zealand Banking Group to report full-year flat cash earnings of A$6.5 billion, or a ROE of about 10 percent, when it becomes the first of the remaining three Big Four banks to report Thursday.

National Australia Bank is forecast to report a 25-percent fall in second half cash earnings to A$2.1 billion Nov. 7, according to analysts, which would translate into a ROE of about 9 percent.

Westpac Banking Corp., meanwhile, is targeting a ROE of up to 14 percent, but analysts expect it to report A$6.9 billion in full-year cash earnings Nov. 4 — closer to a 10-percent ROE.

“We believe that Westpac may abandon this and adopt a lower target of about 11 to 12 percent,” UBS analysts said in a note.

Government interest rates, which are used worldwide as benchmark risk-free rates, have shrunk sharply as central banks take action to stimulate their economies.

The Reserve Bank of Australia this year cut the cash rate to 0.75 percent from 1.5 percent, hurting bank margins given they are unable to reduce deposit rates to offset the cheaper mortgages they must offer borrowers.

(SD-Agencies)