Royal commission points to big bank dominance

The paper points to the role of authorised deposit-taking (ADI) institutions, which hold 55 per cent of the total assets of Australian financial institutions.

The paper notes that five of the 20 listed companies that make up the ASX20 are banks, saying that the major banks have “generally achieved higher profit margins than other types of ADIs”.

“The major banks earned a profit margin of 36.4 per cent in the June quarter 2017. Major banks’ net profit after tax in the June quarter 2017 was $7.8 billion,” the paper says.

While the commission notes that precise international comparisons are difficult, it has found that Australia’s major banks are “comparatively more profitable (as assessed by net income as a percentage of total assets) than some of their international peers in Canada, Sweden, Switzerland and the UK”.

The paper says: “Similar conclusions can be reached for international comparisons for Australian major banks’ return on equity.”

Report findings

According to the report, ADIs generated an after-tax profit of around $35.9 billion in the 12 months to 30 September 2017, with the big four banks achieving higher profit margins than other ADIs.

ADIs in Australia held $4.6 trillion in assets at the end of the said period, approximately 55 per cent of the total assets held by financial institutions and 2.5 times the size of the nation’s $1.8 nominal economy. The nation’s big four banks hold approximately three-quarters of the total assets held by ADIs, the background paper reads.

In September 2017, housing loans represented around 42 per cent of total assets held by ADIs, with term and other loans and advances accounting for 27 per cent.

ADIs provided a total of $1.07 trillion in loans for owner-occupied housing, and an additional $560 billion in investment housing, as of November 2017. Ninety-eight per cent of total housing finance is provided by banks and the remainder by permanent building societies and credit co-operatives. 

There were approximately 5.8 million residential term loans provided by ADIs as of September 2017. Around 1.6 million of these, or 27 per cent, were interest-only loans; 2.2 million, or 38 per cent, were loans with offset facilities; and 4.1 million, or 71 per cent, were loans with redraw facilities.

By the end of Q3 2017, the average balance of residential term loans stood at $264,000, with the average balance being higher for interest-only loans ($347,000) as well as loans with offset facilities ($314,000). 

According to the background paper, commercial lending by banks has decreased over the last 10 years from around 49 per cent of total lending in December 2007 to 33 per cent in December 2017. The decline is attributed to rises in government debt securities purchased by banks as well as lending to individuals.

Credit card debt has similarly declined over the last decade from a peak of 3.6 per cent of nominal GDP in 2007–2008 to 3.0 per cent of GDP in 2016–2017. 

As of November 2017, around 1 per cent, or $51.4 billion of the $4.6 trillion in assets held by ADIs, represented credit card debt, with roughly 16.7 million credit and charge card accounts in existence. The collective balance at the time was approximately $52.2 billion, with an average balance of $3,128 per account.

The background paper also reports a 32 per cent decline in the number of ADIs over the last 10 years, dropping from 217 in Q3 2007 to 147 in Q3 2017. This is due to an 87 per cent reduction in the number of credit unions and 10 per cent in building societies during the decade.

By contrast, the number of banks operating in Australia has grown more than four-fold from six at the end of Q2 2011 to 28 in Q3 2017. The growth is attributed to regulatory changes in 2010 enabling credit unions and building societies that met APRA’s minimum capital requirements to refer to themselves as banks.

The first hearing in the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry took place on Tuesday, 6 February.

[Related: 1 in 10 submissions to royal commission relate to brokers]