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Commercial Banking Industry In Australia

Funding supplied by Australian banks and capital markets grew 190% from 2002 to 2012 to $3.7 trillion in 2012. To increase the funding options for Australian companies, banks may have to consider the role that they can play in stimulating the development of domestic bond market, developing new products to attract and unlock funds from less productive assets.

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Definition / Scope

  • A commercial bank is a type of a bank that provides services such as accepting deposits, making business loans and offering basic investment products. 
  • Commercial bank can also refer to a bank or a division of bank that mostly deal with deposits and loans from corporations or large business.
  • Commercial banks engage in activities such as processing payments via telegraphic transfer, internet banking, and accepting money on term deposits, providing documentary credit, cash management and treasury.

Market Overview

  • Australia is going through a period of sustained house price appreciation and increases in household debts in 2015.
  • The trend series for the value of total lease finance commitments rose 1.65% in April 2015 as compared to March 2015.[1] In lending the ‘Big Four’ banks, ANZ, CBA, NAB and Westpac, control more than 82% of the loans in Australia.
  • Because the relative size of the working age population in Australia is declining, in order to sustain the 3% GDP growth in 2030, the productivity needs to increase from 1.5% in 2014 to 1.8% in 2030.
  • The average home loan rate was 4.98% in February 2015 but has now reached 4.72% in June 2015.[2]
  • The ‘Big Four Banks’ reported a profit after tax of USD 15.4 billion in the first half of 2015.[3]
  • With the increased use of mobile phones and growth in internet technology, 59% of Australians (11.2 million) use internet banking, as seen in 2013.[4]
  • The level of satisfaction by using internet banking is around 91% among the ‘Big Four Banks’, with CBA on the highest by 93% in 2013.[4]

Key Metrics

Metrics Value Explanation
Base Year 2016 Researched through internet


Market Risks

  • Banks in other markets have dwell equity release products that can be used to unlock value from property and free up equity. Similar products have been explored in Australia but have not been successful because there is less cooperation with the government to introduce regulation around equity-release products.
  • Australia is going through a period of sustained house price appreciation and increases in household debts in 2015. These trends pose a threat to Australian banks because they increase the risk of an eventual correction in the housing market.[5]
  • In 2012, politics and regulations were among the key risks faced by Australian banks. Excessive regulations could reduce lending support from banks and could increase credit risks.

Top Market Opportunities

  • Because of the efforts of individual banks and the regulator, banking in Australia is less risky. The four indicators of risk are:
    • Capital Position: When a bank holds more capital its stability increases and risk is lower. The ratio of high quality liquid assets more than doubled from 2009 to 2014 to more than 4% domestic assets.
    • Leverage: in Australia the leverage has been declining since 2008 financial crisis dropping from 130% to 112% in 2012.
    • Funding Composition: Australian banks reduce their exposure to short-term whole sale debt from 28% to 13% from 2008 to 2012.
    • Non-Performing Loans: the non-performing loan ratio of Australian banks has been low. During 2008, it grew to 1.7% and is on the decline i.e. 1.3% in 2012.
  • The Reserve Bank of Australia (RBA) published new rules regarding the Committed Liquidity Facility (CLF) in 2012 which was supposed to launch in 2015. It is an emergency loan program which allows Australian banks to trade in Residential Mortgage Backed Securities (RMBS) to RBA for short term loans in the event of a crisis.[6]
  • All Australian bank’s return on equity improved to 16.1% in 2013 compared to 15.9% in 2012.[7]
  • The return on investment of the ‘Big Four Banks’ lifted moderately during 2013 to 0.95% as compared to 0.92% in 2012.[7]
  • The reserve Bank of Australia has cut the interest rates to a record low of 2% in May 2015, sending the Australian dollar up 0.9%.[8]
  • Australian banks issued just $69 billion in bonds in the first half of 2014, $14 million more than the previous six months.
  • There was a modest increase in the average deposit to 74.7% in 2014 as compared to 74.5% in 2013.
  • With the increased use of mobile phones and growth in internet technology, 59% of Australians (11.2 million) use internet banking, as seen in 2013.[4]
  • The level of satisfaction by using internet banking is around 91% among the ‘Big Four Banks’, with CBA on the highest by 93% in 2013.[4]

Market Drivers

  • The volume of deposits in commercial banks in Australia quadrupled from 2002 to 2012, rising from $0.5 trillion in 2002 to $2 trillion. This growth rate was due to the buildup of funds through the superannuation pool.
  • Funding supplied by Australian banks and capital markets grew 190% from 2002 to 2012 to $3.7 trillion in 2012.[9]
  • Funding supplies in the form of loans grew from $1 trillion in 2002 to $2.7 trillion in 2012, with banks increasing their share of loan market from 72% to 85% during the same period.[9]
  • During 2002-2012, funding supplied in the form of bonds grew from $.0.24 trillion to $1.1 trillion. The share of total domestic funding fulfilled by loans is 70.4% which is high compared to other countries.
  • The amount of money flowing through payments system in Australia has grown 80% between 2002 and 2012 reaching $17 trillion.[9]
  • Profits for collective banks in Australia increased from $17 billion in 2005 to $26 billion in 2012.
  • The total value of owner occupied housing commitments excluding alterations and addition rose 1.3% from March 2015 to April 2015 in trend terms.
  • The value of total personal finance commitments rose 0.5% in a month i.e. from March 2015 to April 2015.[10]
  • Fixed lending commitments rose 1.5%, while revolving credit commitments fell 1% during the same period.[10]
  • The trend series for the value of total commercial finance commitments rose 2.4% during the one month period.[10]
  • Fixed lending commitments rose 3.4%, while revolving credit commitments fell 0.4%.[10]
  • The trend series for the value of total lease finance commitments rose 1.65% in April 2015 as compared to March 2015.[10]
  • The Australian majors posted a record in 2013 of combined statutory of profit before tax of $37.8 billion for 2013 as compared to $33 billion in 2012, an overall increase of 14.7%.[7]
  • The average net interest margin fell by 4 basic points to 213 basic points in 2013 compared to 217 in 2012.[7] In 2015, it fell to 204 points as compared to 207 points in 2014.[11]
  • Total net interest income increased slightly by 3.8% to $52.9 billion in 2013 as compared to $51 billion in 2012.[7]
  • Non-interest income including the wealth management business, fees and commissions, market incomes and other incomes increased 5.3% from $22.8 billion in 2012 to $24 billion.
  • The average home loan rate was 4.98% in February 2015 but has now reached 4.72% in June 2015.[12]
  • The ‘Big Four Banks’ reported a profit after tax of USD 15.4 billion in the first half of 2015.[11]
  • Housing credit grew by 7.2% to USD 1,370 billion for the year 2014.[7]

Market Size and Forecast

Lending Finance, Australia.[1]

Standard Variable Loan Share in March 2014.[13]

Profit earned by the Big Four Banks in Australia in 2014.[14]

Market Outlook

  • Because the relative size of the working age population in Australia is declining, in order to sustain the 3% GDP growth in 2030, the productivity needs to increase from 1.5% in 2014 to 1.8% in 2030.
  • To increase the funding options for Australian companies, banks may have to consider the role that they can play in stimulating the development of domestic bond market, developing new products to attract and unlock funds from less productive assets.
  • Industry Value Added, the contribution industry makes to Australian GDP, is forecasted to grow at an annualized 4.9% over 10 years through 2014-2024.
  • Equity analysts are forecasting the major bank’s profit growth to moderate, to 9% in 2015 and 5% in 2016.[15]
  • The RBA cash rate will cut from 2.25% in February 2015 to 2% in June 2016.[16]

Key Market Players

  • In lending the ‘Big Four’ banks, ANZ, CBA, NAB and Westpac, control more than 82% of the loans in Australia.
  • In life insurance, the four banks hold 53% of the total premiums. If AMP’s market share is added then the percentage rises to 81%.
  • Bank of Queensland has about 300 branches and 650,000 customers and is known for its customer satisfaction, ranking 88% satisfaction among its customers in 2007.
  • In March 2015, Commonwealth bank ranked 10th among the biggest banks in the world. Westpac ranked 13th and ANZ ranked 19th with market capital of  US$91.39 billion and US$75.51 billion respectively.[17]
  • NAB ranked 21 in 2015 among the biggest banks in the world with a market capital of US$70.84 billion.

References

  1. 1.0 1.1 http://www.abs.gov.au/ausstats/abs@.nsf/mf/5671.0
  2. http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Financial-Institutions-Peformance-Survey/Major-Banks/Pages/major-australian-banks-half-year-2015.aspx
  3. http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Financial-Institutions-Peformance-Survey/Major-Banks/Pages/major-australian-banks-half-year-2015.aspx
  4. 4.0 4.1 4.2 4.3 http://www.roymorgan.com/findings/5203-internet-banking-on-rise-201309200624
  5. http://www.smh.com.au/business/banking-and-finance/australian-banks-exposed-to-rising-house-price-correction-risk-moodys-20150514-gh10w7.html
  6. http://www.dailyreckoning.com.au/australian-banks-at-risk-to-the-core/2012/10/26/
  7. 7.0 7.1 7.2 7.3 7.4 7.5 https://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Financial-Institutions-Peformance-Survey/Major-Banks/Documents/major-australian-banks-full-year-results-2013.pdf
  8. http://www.ft.com/cms/s/0/56568c30-f2e5-11e4-a979-00144feab7de.html#axzz3f5zwf0zd
  9. 9.0 9.1 9.2 http://www.ibisworld.com.au/industry/default.aspx?indid=1818
  10. 10.0 10.1 10.2 10.3 10.4 http://www.abs.gov.au/ausstats/abs@.nsf/mf/5671.0
  11. 11.0 11.1 http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Financial-Institutions-Peformance-Survey/Major-Banks/Pages/major-australian-banks-half-year-2015.aspx
  12. http://www.news.com.au/finance/economy/rba-leaves-interest-rates-on-hold/story-e6frfmn0-1227379738506
  13. http://www.theaustralian.com.au/business/smaller-lenders-catch-up-on-the-big-four-banks/story-e6frg8zx-1226892670724
  14. http://www.smh.com.au/cqstatic/11gy42/SMHA21FBA05NOV14.jpg
  15. http://www.rba.gov.au/publications/fsr/2014/sep/pdf/aus-fin-sys.pdf
  16. http://www.nab.com.au/business/international/financial-markets/interest-rate-forecast
  17. http://www.relbanks.com/worlds-top-banks/market-cap


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