Australia's big four banks could face big decisions after a 2.5 per cent drop in their combined first-half earnings.
National Australia Bank, ANZ, Westpac and Commonwealth Bank made a combined cash profit of $14.8 billion as increased funding costs and bad debts hit the bottom line.
Investors will await dividend announcements with bated breath after ANZ cut its interim payout by eight per cent this week, while mortgage holders should enjoy the latest round of rate cuts while they last.
"There's no sign of the margin pressure abating anytime soon, particularly as most of the majors passed on the recent RBA rate cut in full," PricewaterhouseCoopers Australia's financial services leader Julie Coates said.
"With increased political scrutiny, a federal election campaign and the threat of a Royal Commission in the mix, future pricing decisions also take on a different dimension."
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
Three of the big four passed on the full cut, with NAB - whose 6.5 per cent lift in first-half cash earnings to $3.31 billion made it the star performer among its peers - announcing its move less than two minutes after the RBA decision.
"There has been a political component to the speed with which the banks reacted," CMC Markets chief market strategist Michael McCarthy said.
"Although they did manage to improve margins in this half, the question of where that improvement continues to come from is more open and not passing through the full value of cuts is one option."
Out-of-cycle rate rises like those imposed by the major lenders last year is another, Mr McCarthy said.
ANZ already capitalised on the latest RBA cut, reducing its standard variable rates by 19 basis points the same day it announced a 24.3 per cent drop in cash earnings to $2.782 billion - its lowest since 2010.
Westpac lifted first-half cash earnings 3.3 per cent to $3.904 billion, while Commonwealth Bank - which reported in February - lifted its 3.9 per cent to $4.80 billion.
ANZ took a $717 million hit from writedowns and restructuring charges as it turns away from Asia, while NAB's statutory results showed a $1.74 billion loss following its exit from the UK.
"As they continue to rationalise portfolios, strengthen balance sheets and focus on building their core domestic business, the key question that remains is: `what will drive future growth?,'" Ernst and Young's Tim Dring said.
Increased regulatory costs are reducing the gains from continued efficiency measures but the worst could be over with regards to provisions for bad loans related to the resource industry.
"The increase in non-performing loans is off a very low base," Mr Dring said.
"Essentially, rates are normalising after a period of unusually low levels."
The challenge for the banks is clear.
"Growth will go to those that can meet the challenge of rising customer expectations, prioritise where and how they deploy their capital, all whilst keeping a lid on costs and responding quickly to regulatory changes," PwC's Ms Coates said.
"To do this banks will need to be simpler, smaller, and more deeply connected to their customers than ever."
