Hayne in early dig at bank prof­its

The Weekend Australian - - BUSINESS - MICHAEL RODDAN BANK­ING

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.

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