{"id":134228,"date":"2023-09-04T01:59:11","date_gmt":"2023-09-04T01:59:11","guid":{"rendered":"https:\/\/fin2me.com\/?p=134228"},"modified":"2023-09-04T01:59:11","modified_gmt":"2023-09-04T01:59:11","slug":"size-matters-even-if-australian-banks-are-no-longer-at-peak-profitability","status":"publish","type":"post","link":"https:\/\/fin2me.com\/markets\/size-matters-even-if-australian-banks-are-no-longer-at-peak-profitability\/","title":{"rendered":"Size matters, even if Australian banks are no longer at peak profitability"},"content":{"rendered":"

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The aphorism goes that \u201cbigger is better\u201d, but that may not seem the case with the multibillion-dollar banking sector.<\/p>\n

Commonwealth Bank, NAB, Westpac and ANZ are household names \u2013 they dominate the market and are known as the \u201cbig four\u201d. You could even say they have BBE: big bank energy.<\/p>\n

<\/p>\n

In the big banks\u2019 defence, some metrics of their profitability have gradually softened.<\/span>Credit: <\/span>Millie Muroi<\/cite><\/p>\n

Australians love to hate them, but they\u2019re pretty popular. Together, they hold about $1 trillion, or about 73 per cent, of all Australian household deposits, and about the same proportion of home loans. By comparison, the four biggest banks in the United States held about 45 per cent of household deposits in 2021.<\/p>\n

This means that Australian banks have a lot of power to flex. The bigger a company is, the harder for competitors to put up a fight. And the less competition, the more those big companies can set their own terms. In the business world, less competition \u2013 as a rule \u2013 means firms can charge customers more.<\/p>\n

It hasn\u2019t always been like this. Over the years, banks have sized each other up, and some have decided they like each other enough to get married.<\/p>\n

In 1990, then Labor treasurer Paul Keating introduced the \u201cfour pillars policy\u201d to prevent mergers between Australia\u2019s big four banks and preserve a level of competition. But, of course, that hasn\u2019t stopped the big banks from absorbing smaller rivals: Westpac\u2019s friendly takeover of St George Bank in 2008; CBA\u2019s acquisition of BankWest the same year, to name two.<\/p>\n

Few sectors in Australia are as uncompetitive as banking, and it has meant over the years that the big four have become some of the most profitable banks in the world.<\/p>\n

That\u2019s not necessarily<\/i> a bad thing. Some credit the strength and stability of the Australian banking system for the country\u2019s resilience during the global financial crisis, and when the failure of Silicon Valley Bank in the US sent shockwaves throughout the world this year, many were assured by the robustness of our banks.<\/p>\n

Matt Comyn, head of our biggest bank, CBA, defended the company\u2019s largest-ever profit of $10.2 billion this year by saying it meant the bank could support the wider economy amid tougher conditions.<\/p>\n

Of course, if you\u2019re not a shareholder, it sucks when those profits seem to come at your expense in the form of higher mortgage rates while deposits seem to grow at a suspiciously slower rate. Higher mortgage rates mostly reflect the return of interest rates to more historically normal levels. But the competition watchdog has <\/i>noticed some red flags on deposit rates, and it is probing the banks this year through an inquiry.<\/p>\n

The big banks broadly deem that there\u2019s enough competition, though that\u2019s unsurprising given it\u2019s in their interests to maintain or grow their current standing.<\/p>\n

But it\u2019s true that there have been signs of more intense competition, some<\/i> winding back of banks\u2019 margins and a few new kids on the block.<\/p>\n

Neobanks including Judo and Tyro have caused some disruption, alongside regional banks, but the biggest feather-ruffler recently has been Macquarie Bank.<\/p>\n

Macquarie\u2019s share of the home loan market sits at only about 6 per cent \u2013 this compares with about 26 per cent and 22 per cent for CBA and Westpac, respectively. But it has penetrated a market dominated by the big four in a startlingly speedy way. So, what\u2019s the one weird trick Macquarie used to grow its market share that the other banks hate it for?<\/p>\n

First, it pays to have rich parents. Macquarie Bank\u2019s parent, Macquarie Group, is a financial services group with a formidable global presence and deep pockets.<\/p>\n

Macquarie has spent up big on technology, building new services from the ground up to attract customers and focusing on simple, easily approved loans rather than complex ones that require more work to get over the line.<\/p>\n

But Macquarie\u2019s growth in the home loan market has begun to wane, and its standout success shows that without significant financial heft, it\u2019s pretty hard even to begin measuring up to the big four.<\/p>\n

In the majors\u2019 defence, some metrics of their profitability have<\/i> gradually softened. Their return on equity \u2013 a measure of their annual profits as a percentage of shareholders\u2019 money \u2013 has drifted from about 15 per cent in 2015 to 10.6 per cent in 2022. Meanwhile, their net interest margins \u2013 the difference between their funding costs and what they charge for loans \u2013 have come down from the glory days of 2.8 per cent during the early 2000s to about 2 per cent last year.<\/p>\n

They\u2019re still making billions, but for CBA, for instance, that\u2019s on a balance sheet of about $1 trillion. The banks aren\u2019t necessarily more profitable than they were back in the day.<\/p>\n

Some people argue that banks\u2019 relatively high profits can be justified because banking is a risky business. Being a big, profitable bank can shield them from trouble during economic downturns, but that doesn\u2019t always save a business from trouble. Historically, when major banks have<\/em> found themselves in a sticky spot, the government has tended to help them out of it \u2013 mostly because if a big bank fails, there\u2019s a lot<\/em> on the line for the country to lose.<\/p>\n

This year, the major banks noted intense competition for home loans, calling their own pricing behaviour \u2013 including ultra-low fixed rates and cashbacks \u2013 \u201cirrational\u201d. By most accounts, that was a temporary flurry in competition, and the banks say they\u2019ve toned down their efforts to court borrowers. The narrative now is that competition for people\u2019s deposits will intensify.<\/p>\n

That doesn\u2019t mean we should take our eyes off their size and growth ambitions, though.<\/p>\n

ANZ is fighting back against the Australian Competition and Consumer Commission\u2019s decision to block the bank\u2019s proposed deal with a non-major bank: Suncorp. The ACCC ruled that a merger between ANZ and Suncorp\u2019s banking division would substantially lessen competition in the banking sector by removing an important competitor against the big four banks.<\/p>\n

ANZ boss Shayne Elliott\u2019s argument is that, as the smallest of the big four, the bank would become more effective as a competitor against CBA and Westpac, which have 26 per cent and 23 per cent market share, respectively. He says ANZ\u2019s market share is closer to that of Bendigo Bank than CBA, and that if ANZ absorbed Suncorp\u2019s banking division, the combined business would have 15 per cent market share, an improvement on its current 13 per cent.<\/p>\n

There\u2019s some merit to ANZ\u2019s argument, but it\u2019s important to tread carefully when it comes to allowing further consolidation in a sector that is among the least competitive and one of the biggest in the Australian economy. ANZ and Suncorp\u2019s merger, in and of itself, may not dramatically alter the competitive landscape, but the precedent it sets for big banks to continue taking over smaller ones very much could.<\/p>\n

We\u2019ve opted for bigger, safer banks in Australia by allowing the big four to merge with smaller players. While the big banks may no longer be at their peak profitability, we need to keep the banking arena open to new competitors and remember that bigger is not always better.<\/p>\n

Ross Gittins is on leave.<\/strong><\/p>\n

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. <\/i><\/b>Sign up to get it every weekday morning<\/i><\/b>.<\/i><\/b><\/p>\n

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