'Repetition doesn't make true': ABA CEO on big four profits being world's highest

by Mackenzie McCarty09 Oct 2013

While Australia’s banks are undoubtedly successful when it comes to profitability, they’re not, as is so often claimed, the ‘most profitable in the world’, claims Australian Bankers’ Association CEO, Steven Münchenberg.

“’Australia’s banks are the most profitable in the world…’ I see this line used so often, in the media or by politicians, that even I start to believe it,” says Münchenberg.

While the Bank for International Settlements (BIS) ranked Australia’s big four banks the most profitable in the world for the third year running this year, showing the major lenders made better returns than banks in 10 other developed nations (including the US, Britain and Europe) and can earn upwards of $71m a day, Münchenberg believes the phrase ‘most profitable’ isn’t even-handed.

“To compare our banks’ performance internationally, we have to remember the impact of the GFC on banks around the world. In a world where many banking systems are still struggling to recover from the financial crisis and bank profitability has fallen dramatically, we would hope that our banks sit towards the top of the list.”

So if Australia’s banks aren’t the most profitable in the world, then whose are? In order to answer that question, according to Münchenberg, we need to look to the east.

“If we really want to find the world’s most profitable banks, we need to look to countries such as China, Indonesia or Russia. In China, the major banks have returns on equity (ROE) of over 20%. Return on equity…is the appropriate measure of company profitability that allows comparisons across countries and across sectors of the economy.”

Australia’s banks, he says, fall ‘well short’ of these levels of profitability, with the majors all having an average ROE of 16%.

“They are far from being ‘the most profitable in the world’. But there are all sorts of reasons why comparing Australia’s banks with those in China or Russia is not quite right. To really understand where our banks sit, we need to compare our banks with a similar country.”

He says comparing Australian banks to Canada makes more sense, as both countries have open economies with strong mining and agricultural exports. However, Münchenberg says Canada, with a  population around 50% larger than Australia’s, has six major banks with an average ROE of almost 18%.

“So even when compared to Canada’s banks, Australia doesn’t lead the pack,” argues Münchenberg.

“It is surprising how often the assertion that we have the world’s most profitable banks gets made. It’s almost as if those making it hope that by constantly repeating it, it will somehow become the truth. But those making the assertion aren’t cheering for Australia having world-leading banks. They are using the false claim to justify their own arguments for government intervention, through higher taxes on banks, or for more regulation.”

COMMENTS

  • by Regional Broker 9/10/2013 9:55:43 AM

    Why Give these guys publicity only time I have seen an industry body making excuses for their members profitability !

  • by Steve McClure 9/10/2013 11:41:29 AM

    Everyone puts their spin on it to justify their claims & agenda. Canada's largest bank, RBC had assets $825B & NP $7.5B in 2012. CBA assets 753B & NP $7.7B in 2013 - so their ROA is higher. Given that Canada population is almost 60% higher, profit per capita is significantly lower, as are their margins. Even though RBC's profits are expected to grow 10% this year, their 2nd largest bank's profits recently fell. NAB in Australia continued to rise. The most profitable claim is based on data from BIS - hardly a lie.

  • by Positive Broker 10/10/2013 7:37:33 AM

    Does it really matter if they 1st, 2nd or 3rd. Either way they very profitable thanks to a lack of competition.