Submission to the Inquiry into Competition within the Australian Banking Sector 7. Profitability

The uninterrupted period of economic growth since the early 1990s has enabled the Australian banking system to grow steadily and maintain a healthy profit stream. The major banks' return on assets has averaged around 0.9 per cent and the post-tax return on equity has averaged about 15 per cent since 1992 (Graph 32). These returns are similar to those of other major companies in Australia as well as those of banks in other countries prior to the global financial crisis (Graph 33 and Graph 34).

The main factor which contributes to large swings in banks' profitability is losses on their asset portfolios. This has been particularly evident in the profitability of banks in other countries, where large losses on loans and securities holdings have seen banks in the United States, United Kingdom and Europe incur sizeable losses. In Australia too, in the past three years movements in banks' charges for bad and doubtful debts have resulted in large swings in their reported profits.

In particular, the profit growth of Australian banks was adversely affected by sizeable increases in bad and doubtful debt charges in 2008 and 2009, although these rises in debt expenses were well below those experienced in many other countries (Graph 35). In 2010, bad and doubtful debt charges of Australian banks have declined, leading to a commensurate gain in profits. These differences in experiences with bad debt expenses largely explain why Australian banks' return on equity has remained higher than rates achieved by overseas banks since the onset of the global financial crisis.