Hayne in early dig at bank profits
The royal commission into banking and financial services has called out the globally high profitability of the nation’s largest banks in its first formal paper published before Monday’s initial hearing that kicks off the year-long inquiry.
The report caps off a week of intense scrutiny on the profits being raked in at the big four banks — Commonwealth Bank, Westpac, ANZ and National Australia Bank — after the nation’s official policy advisory published a lengthy review of the financial system which was highly critical of the major banks.
The Productivity Commission review of the financial system found banks and insurers were uncompetitive and boosted profits at the expense of loyal customers. Competition levels were “less than desirable” for home loans, credit cards, home insurance, wealth management and financial advice, and the major banks had the power to pass on costs and set prices without the threat of losing market share — all while delivering inordinate returns to shareholders, the Productivity Commission said.
CBA chief executive Ian Narev on Wednesday used his last earnings announcement to defy critics who argued that the bank has been too profitable at the expense of customers and regulatory compliance, as his bank booked a cash profit of $4.73 billion for the six months to the end of December. The return on equity of incoming chief executive Matt Comyn’s retail banking division, responsible for mortgages and customer deposits, was estimated at a record high 30 per cent, more than double profitability of the entire group.
Return on equity is the measurement of income return to shareholders as a share of equity held, which reveals how much profit a company makes with the money shareholders have invested.
Scott Morrison yesterday told the Citi A50 event in Sydney that his new data-sharing laws announced on Thursday, which would fine lenders for not passing on information about customers’ good credit history, would break the major banks’ “stronghold” and boost the ability of smaller banks to compete.
Yesterday, royal commissioner Kenneth Hayne issued a lengthy background report on the structure of the Australian financial system, which highlighted the rates of profit made at the major lenders.
“Over the past 10 years, the major banks have generally achieved higher return on equity than other types of (banks),” the report said.
“The major banks earned a return on equity after tax of 13.6 per cent in the June quarter (of) 2017. Other domestic banks earned a return on equity after tax of 10.4 per cent in the June quarter (of) 2017.”
The report also said the major banks had achieved higher profit margins than other lenders over the past decade, with a profit margin of 36.4 per cent at the end of last financial year, well above smaller lenders’ profit margin of 24.7 per cent.
While it was hard to draw direct comparisons globally, the royal commission said “publicly available information broadly indicates Australia’s major banks are comparatively more profitable” than banks in Canada, Sweden, Switzerland and Britain — countries in which the concentration of the financial system is broadly similar to that in Australia.
In the local system, the four major banks control about 75 per cent of all the assets held on balance sheets. In mortgages, the big four write about 80 per cent of all mortgages.
“Using this measure of market concentration, the level of concentration in the Australian banking system can be regarded as similar to the levels observed for the banking systems in Canada, The Netherlands and Sweden,” the report said.
The banking regulator, the Australian Prudential Regulation Authority, has tasked a panel led by the regulator’s former chairman, John Laker, with investigating the “dynamic between CBA’s financial success and any shortcomings in its responsiveness to and management of risk” at the bank, which has been accused of breaching antimoney-laundering legislation more than 50,000 times.