Australian banks most profitable in the world

The Bank of Interntional Settlements (BIS) released its 2011/12 annual report over the weekend and the results were spectacular for Australia’s banks for the year:

As a percentage of total assets, that’s Australian banks at number one, with net interest margins at fourth, loan loss provisions at sixth and operating costs at second.

No wonder they’re on top. This is all the more remarkable given the following table of GDP and credit gowth, on which Australia’s perfomance is miserable:

Except fo course for one thing. This is a brilliant depiction of disleveraging, with Australia sporting what is clearly the best credit/GDP gap in the world by miles, even though credit is still growing.

By crickey, we’re a lucky lot! Especially the banks.

(And BTW, you have to wonder this is not worth a headline at the AFR, The Oz or the BSOz).


Houses and Holes
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  1. Now let’s wait for the spruiking about how “strong” our banks are to sooth the markets. Our bankers and politicians love to substitute profitability for balance sheet strength.

    Our banks are some of the weakest organisations in Australia when you take into account their leveraged balance sheets.

        • As I’ve posted, Megabank does carry unrecognised excess risk but its not the only factor which makes it highly profitable.

          The externality, ie govt guarantee, keeps funding costs down and the NIM up.

          Megabank also does not carry a large portfolio of low risk government or other securities to support its liquidity. RBA repo facilities currently carry out this role at no cost. In the future the CLF at 15bps pa will also incresae liquidity. These facilities allow Megabank to lend the available funds into mortgages at wide margins, increasing NIMs.

          These are taxpayer supported measures which increase Megabank profitability. I’m sure this is acceptable to some.

          Lastly, Megabank clearly has low loan losses. As the housing melt or pop continues this is most unlikely to continue. However, this is currently being masked by borrower support programs which could make the situation much worse.

          If Megabank is truely the most profitable in the world then we are all paying for it and are also likely to pay for the losses when they occur. Again a situation which is acceptable to some

        • What astounds me is that during times like the last few years (when our banks have been creaming it and particularly in light of the global financial bust) is that our banks are not forced to retain their earnings to strengthen their balance sheets so they can ride out future storms without leaning on the taxpayer.

          The capital adequacy arrangements seem to count for nothing when there is a credit freeze or large downturn in the property market which affects bank asset quality resulting in significant losses.

          • No need, Australia has low public debt, we will borrow and bail them out. Thats what all the other modern economies do.

            Making them retaim profits would be messing with their dividends, which is unacceptable because… I dont know why, but apparently it is.

          • Alex Heyworth

            This situation was virtually forced on the banks by the ridiculously low interest rates that prevailed over the last decade in most of the western world. When borrowing is so much cheaper than capital, it is market suicide to have low borrowing and lots of capital. Any bank that had done that would have been easy meat for a takeover.

            Over the last couple of years the banks have been fairly active in shoring up their balance sheets, although they have resorted to mongrel solutions like covered bonds rather than retaining more earnings or having a capital raising.

            The bottom line is that maintaining the right debt to equity ratio for the current climate is a very delicate balancing act for banks in particular. They are very vulnerable if they get it wrong.

          • Good point. They certainly weren’t forced however to write residential property deals at 90% + LVRs which is where the real potential for trouble is lurking.

          • You guys are all onto it. This is just another symptom of a classic, by-the-book house price bubble. Record bank profits, surprise, surprise.

            And of course the banks don’t care one iota about good analysis and advice when they know they will get a taxpayer bailout anyway. Is this “market failure”…..?

            If it is politically impossible to not guarantee banks and just risk the consequences, I reckon a Lee Kuan Yew approach is absolutely essential. Key people need to know they will be prosecuted and certainly sacked at the very least, in the event that a bailout becomes necessary. But this is too late now.

            I am convinced to this day, that had Wall Street known they would not be bailed out, or even had the executives known that a condition of bailout was their own dismissal and banning from the holding of finance executive positions for the rest of their lives, then a “free market” solution would have been found pretty smartly. “Systemic risk” was just something that was inevitably going to be “tried on” with ignorant and vain politicians, regardless of the truth. Reagan would not have bought it.

      • Should we be worried about our savings in Australian banks? With all the talk about bank runs in Europe I’m starting to get concerned. We’ve just sold our house and have decided to rent while we watch the world of finance (and Aussie house prices) implode but my husband is equally concerned about having our savings in the bank even with the government guarantees in place. Sorry if this is a naive question but I’m a non-finance minded average Australian trying to get a handle on different areas of risk and this is one topic I’ve not seen anyone on Australian blogs talk about (the safety of money in Australian banks that is). Is he being a little too paranoid?

        • Deposits are Govt-guaranteed, you’re more likely to lose your shirt holding Aust Govt bonds than you are losing your deposits.

          But cash deposits are vulnerable to inflation other currency movements..

          • Deposits are Govt-guaranteed, you’re more likely to lose your shirt holding Aust Govt bonds than you are losing your deposits.

            Huh? If the Gov’t can’t afford to cover their bond payments, how exactly do you think they’re going to cover deposit guarantees? It’s not as though Aussie banks are paying an insurance fee like the FDIC in the US.

          • The Govt can always remove the guarantee. But they can also print their way out of trouble.

            RBA will only remain independent as far as everything is okay. If shit hits the fan, you can bet your ass that the Govt will force them to print before they remove the guarantee (which would cause a bank run).

          • Additionally, the Govt would always bail out depositors first.

            It’s way more politically acceptable to default on our bonds (63% held offshore) than it would be to bankrupt the citizenry.

          • If your holding a 10yr govt bond and your yield is 3.25% and the rate rises to 6.25% well the value of your 10 yr bond has dropped by 15% if you want to sell.
            This is what occured in 94 when rates went from 6 to 9% in the space of 6 months.

        • Deposits up to $250k are government guaranteed for ADIs per this list:

          I am not clear on how super fund wrap accounts are treated where a number of ADIs are used to avoid exceeding the limit in any one deposit despite the combined balance being in excess of $250k.

          European countries are vastly different to Australia because each does not have monetary sovereignty. The Australian government can create money with a few strokes on a keyboard as can most other countries using their own currency. That is not the case in Europe – many countries with a single currency and agreements that limit bailouts.

        • How would a government guarantee actually work in the event of a bank run? Can you get your cash out when you want it? My own impression is that the guarantee is more of a confidence trick than anything else.

        • My understanding is that the government guarantee is limited to $20b per ADI without parliamentary approval. To put this in perspective, the CBA from their 2011 annual report had Customer deposits of $349 billion.

          Not to say that your money isn’t relatively safe, but loaning your money to the bank via way of a savings deposit is not without risk.

      • That’s a point that Steve Keen made. People think that the higher the profits the stronger the bank when a lot of the time it actually means the bank is weak because it has taken on a lot of risk.

    • Charles Ponzi

      As soon as things go wrong, our banks will be crying for bailouts. Banks have taken the profits but the taxpayer will be forced to take the losses.

      Zombie banks in Japan, America and Europe are kept on life support at the expense of savers and taxpayers. It won’t be any different here.

  2. Diogenes the CynicMEMBER

    Sounds like time for a super profits tax on banks!

    Or we could actually pursue some meaningful reform in this sector when it is strong…

      • I say a condition of bailouts should be that executives are dismissed, stripped of any perks they are owed, and barred for life from holding finance industry executive positions. We might find that some sensible analysis and policy advice to govt might come from the banking sector in this case. But it is too late now. We also might find that some “free market solutions” might be worked out by the said executives wishing to avoid the perfectly fair penalties I suggest for landing their entire nation’s citizens in decades of penury.

    • Please! Wake up Australia, when are we going to realise that the banking sector adds no real value to an economy. They run a giant spreadsheet for gods sake. Not only that but they have proven that they are poor allocaters of capital…..

      Make them work for us. 😉

      Chirp chirp…..(crickets in the background)

  3. thomickersMEMBER

    Our banks haven’t revealed their cards yet.

    so many full time jobs in banking cut from 5 to 4 days its starting to get a bit serious and only a matter of time.