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“One is politics and trying to be as politically indifferent and below the radar as much as possible. And the second is, how do you keep on investing further to entrench, and improve, your technology gap versus the other peers.”

Big banks, big targets

If 2023 was the year for record bank profits, 2024 will be remembered as the year that ushered in a changing of the guard with three of the four big banks announcing new chief executives. So what will 2025 be defined by?

Commonwealth Bank, ANZ, Westpac and National Australia Bank collectively clocked $29.9 billion in profits in 2024, down 5.7 per cent year-on-year amid margin pressures and increased costs. Return on average equity also decreased 80 basis points to an average of 10.9 per cent.

Operating income remained flat at $90 billion but net interest margins [NIM], a key measure of profitability that compares funding costs with what lenders charge for loans, fell by 7 basis points to 180 basis points. The average cost to income ratio increased by 336 basis points to 49.2 per cent in a year, as staff wages climbed 3.5 per cent to $25.4 billion.

The largest growth in expenditure was on technology, which soared 15.2 per cent to $9 billion, as banks fight tooth-and-nail to offer their customers a better digital product and best utilise artificial intelligence technology.

Expenses are rising but banks are struggling to grow their revenue, which lifted just 6 per cent this year.

Despite those challenges, banks lifted dividends and announced share buybacks. Since the end of last year, the combined market value of the big four banks has jumped by about $148 billion, to just under $590 billion.

Shares in Westpac are up about 42 per cent this year, CBA 39 per cent, NAB 26 per cent and ANZ 20 per cent. CBA’s value has swelled by about $75 billion since the end of 2023 to make it the biggest stock on the Australian sharemarket.

But analysts are expecting a tough 2025 for the industry, despite the banks’ balance sheets improving in the second half of 2024.

UBS head of Australian banks research John Storey says profit margins – which are likely to come under pressure if the Reserve Bank of Australia cuts interest rates from May as widely tipped – will remain a key focus next year

“Rates are going to be on hold for a lot longer than expected, so maybe the NIM is going to be stronger going into 2025 but also going into the 2026 financial year,” Storey says.

“Much stronger operating expenses growth is also expected in 2025. Market expects operating expenses to be up 6 per cent, with income expenses up 3 or 4 per cent. But the pressure won’t be around staff costs – it’ll be on investments and technology, which is expected to grow 8 per cent next year.”

KPMG head of banking and capital markets David Heathcote expects the trend, going into 2025 and likely beyond, will be technology.

In November, CBA provided a lengthy update on its digital strategy, spruiking the AI transformation of the country’s largest bank. Meanwhile, ANZ is confident it will completely roll out its ANZ Plus and Transactive digital apps over the next few years. And Westpac’s new chief Anthony Miller has pegged the bank’s $3 billion technology transformation program Unite as its top priority, while NAB boss Andrew Irvine has hinted at increasing its spend on technology.

“A huge area of focus for banks is around how can they invest in tech to deliver a better customer experience that will be different to the others,” Heathcote says.

“Speed of time for decision-making, which retail clients look for when they’re switching, is important. And that stickiness is less there – if there’s a better digital offering, simplicity, speed for approvals and good customer service, that’s where clients are looking to turn to.”

But there’s an arguably even bigger challenge for the industry to navigate next year: a fraught political landscape in an election year with cost of living the key talking point for all parties.

And which politician will snub their nose at the opportunity to take on the big end of town “price gouging”, at a time when purchasing power of Australian households has fallen back to 2017 levels on the back of high inflation and high interest rates.

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The airlines have had their day in the sun, so too have the supermarkets and tech giants, and next year it is increasingly looking like the banks will be put through the wringer as mortgage holders continue to struggle.

Labor MPs have already begun railing against credit card surcharges, the federal government is considering imposing a levy to force banks to keep their regional branches open, and Treasurer Jim Chalmers personally intervened when CBA unveiled a controversial move that would have left to about 50,000 extra customers paying a $3 fee to withdraw cash from branches early in the year.

Politicians from across the aisle derided CBA’s “unfair”, “pretty extraordinary” and “greedy” move, and went on breakfast TV vowing to shut down their CBA accounts. While some of the commentary was fair, there were plenty of observations devoid of fact.

“Australia is an interesting market that you don’t find in too many other places around the world: bank CEOs here are quite apologetic about the size and type of profits,” Storey says.

“There’s definitely a lot more pressure on the banks. They’re easy targets, but they’ve definitely got a role to play in terms of how they support the economy.”

Cai agrees, warning banks could be hit with more policies that ultimately affect their profit margin.

“But a small positive is perhaps it won’t be as bad as what the supermarkets faced,” Cai says. “Even the rural bank levy, if you did the numbers for CBA it’s a relatively small levy, $75 million, that can be absorbed.”

But when the big themes of the election are shaping up to be cost of living and housing affordability, there is no way the big banks can avoid becoming public enemy No.1.

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