Australian banks are among the most profitable in the world because they prioritise shareholders over customers — a fact illustrated this week by the Reserve Bank governor.
Dr Philip Lowe came armed to Thursday’s parliamentary hearing, his first as Governor, with a series of charts that showed relatively steady profits for the major banks despite economic instability.
“My assessment is that the borrowers have largely borne the cost of that, not the shareholders,” Dr Lowe told the Standing Committee on Economics.
“It’s an interesting question about who ultimately should bear the cost.”
A member of the Committee, Greens MP Adam Bandt, told The New Daily it was “very significant” that the Governor chose to emphasise the return on equity of the banks.
The major banks have averaged a 15 per cent return on equity over the past two decades, even with the GFC dip is factored in. This is higher than in the United States, Japan and Europe, according to the Reserve Bank.
Return on equity (ROE) is a common measure of bank profitability. It shows how well, and how efficiently, a bank is generating profits for its owners (shareholders) over a period of time. It is calculated by dividing net income by shareholder equity and then expressing that number as a percentage.
The average return on equity for companies in the banking industry is 8.5 per cent, Investopedia reported in 2015.
“That’s a very significant thing for the Reserve Bank to choose to point out to the Committee, and it was made all the more pointed when the Governor said it could’ve come out of their profits, but instead they’ve passed the cost of meeting these new requirements directly onto consumers, or so it appears,” Mr Bandt said.
The additional funding costs referred to by Governor Lowe include requirements for the banks to hold more capital to protect against financial shocks. To do this, the banks have lifted interest rates on term deposits to attract more savings, and curbed risky lending, among other measures.
Despite this, Australian banks are the most profitable in the world, according to a recent analysis by The Australia Institute, an independent think tank. It calculated this by comparing profits to the GDP.
David Richardson, a senior fellow at The Australian Institute, said increased competition — a potential fix flagged by Governor Lowe — had clearly failed.
“What we’ve seen is that when competitors arrive, the big banks take smaller players over, enter into cosy relationships with them, and just get bigger and more powerful.”
It should be noted that many Australian households benefit from high bank profits in the form of dividends and share price growth.
But Professor John Quiggin, Australian Laureate Fellow in Economics at the University of Queensland, said these “huge profits” were “obviously problematic” for the nation.
“Obviously those profits come out of GDP at the expense of everybody else. So the question is, why are we handing out so much in bank profits that are effectively guaranteed by the government?”
‘Incentives culture to blame’
During Thursday’s hearing, Governor Lowe also hit out at the remuneration structure common to Australian banks, which links pay and bonuses to the sale of products. He blamed this system for causing many of the “poor outcomes” that have so infuriated customers.
“What I would like to see is really banking return to be seen as a strong service profession. I don’t know how far away from that we are.”
Greens MP Adam Bandt echoed this point: “For someone with [Governor Lowe’s] experience to put his finger on that and to do it so publicly suggests there is significant need for reform.”
The Australian Bankers’ Association is currently conducting the Sedgwick review of banker remuneration. The CEOs of the Commonwealth Bank, Westpac, NAB and ANZ will also appear before The Standing Committee on Economics in early October.
Mr Bandt, who will assist in questioning the bank bosses, said the committee hearing was a chance for the banks to convince the public that a royal commission — which the Greens and Labor support — was unnecessary.