How Much Profit Did Australia’s Big Four Banks Make In 2016?

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Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing and the big picture factors that are at play. Today: Australia's "big four" banks: Westpac, ANZ, NAB and CBA.

The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).

A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.

The Basel III regulatory requirements, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations.

APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks' loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.

When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products.

Inter-bank liquidity tightened significantly with all banks increasing their holdings of Exchange Settlements Accounts at the Reserve Bank, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.

The big four [CC BY]

There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.

Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are “too big to fail”.

The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period.

This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among the top four safest banking systems in the world.

Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks' largest international exposure is to New Zealand, where all big four banks retain sizeable operations.

Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.

As a last measure of the bank health, we can measure the domestic systemic risk with a methodology based on one used by the official Basel Committee on Banking Supervision. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.

The Conversation

Mamiza Haq, Lecturer in Finance, The University of Queensland and Necmi K Avkiran, Associate Professor in Banking and Finance, The University of Queensland

This article was originally published on The Conversation.


Comments

    Why do these major and even mega companies need to make more profit at the expense of the people that are essentially the reason they are making a profit? Every year we hear doom and gloom if a company hasn't exceeded its previous billion dollar profit, yet they are still making billions in profit. If they were astute enough to make that much, then they should be astute enough to recognise that you can't keep going that way. It really pisses me off that we as a species decided to go down this path in the first place, it's gotten to the point where you feel ashamed or maybe selfish for not spending as much as you can on shit we really didn't need in the first place and yes I'm guilty too. But don't worry, the Chinese the Russians and the yanks are all too ready to start another war to thin the herd and increase profits.

    Last edited 11/09/16 8:45 am

    You know, the good news is these are publicly traded companies, so rather than getting pissy about their big profits, you can buy their shares and get your part of the profits.

    Better yet, their dividends are fully franked, so there's an incentive for Australian Tax Payers to put their savings into the banks as shares, rather than foolishly putting it into banks as term deposits and the like.

      You clearly have no idea about how the average Aussie interacts with modern financial services. Most of us don't make enough to put it towards shares in a bank, Most of us can barely keep enough in the bank to stay ahead of contingencies. Do you rent? if so, how much roughly, do you pay, do you have a mortgage? same, same. Telling people to put it in shares is downright arrogant!

        Solonoid. You seem angry. Businesses exist to make profits. Our banks make obscene profits. If they are doing this within the law in a competitive market place then that's their success.

        Whenever you deal with a bank, screw brand loyalty.

          Not sure you understood my point with respect to my original comment and reply to xqx.
          My point is that the big banks and other corporations, make ridiculous profits at our expense and if they don't make more than the year before, they cry poor. Making a profit is fine, but having to constantly make more, when the company is still well into the black is just greed and just not necessary. As for my reply to xqx, read it properly. Telling people to just suck it up and buy stocks, when they can't afford to, is just plain arrogant. If you can afford it, fill yer boots mate, (Our banks make obscene profits) but don't tell me greed is good.

            Two people have upvoted xqx's stock comment. So it must resonate to some.

        Yes, I have a mortgage, a pretty big one too. But here's a secret - there are more than four banks in Australia - some of them are much cheaper than the big four. My mortgage isn't with any of the big-four banks.

        I also have a superfund. If you've been working for more than a couple of years, I'm guessing you do too. It holds bank stocks. Why? Because they make big profits and pay big dividends. They're also not very likely to go belly-up.

        You don't need a self-managed superfund to manage your investments anymore, most industry or retail funds will let you buy direct shares using your super money - so you don't even actually need any of your own savings to buy bank shares - You just need to take the time and effort to setup your superfund so you can buy stocks.

        I do have some idea how the "average Aussie interacts with modern financial services." They spend more than they earn. They subscribe to Foxtel and buy new iPhones then piss and moan about credit card interest. They do less than 38 hours of paid work a week and never buy their first home. That's not the bank's fault.

        Don't be like the "average Aussie".

          Clearly, still missing the point. Not going to elaborate any further, toodles

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