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Australian Bankers’ Association responds to claims about banks’ ‘record margins’
Sydney, 24 September, 2008: The Australian Bankers’ Association (ABA) is responding to a newspaper report today that banks are enjoying record profit margins. This is not correct; the published statistics used to justify this claim have been misinterpreted.
The measure of bank profit margins (used in the newspaper story) is a ratio of two statistics: (a) bank profit and (b) bank income. This is represented as follows:
Profit margin = bank profit / bank income
In the latest quarterly performance statistics published by Australian Prudential Regulation Authority (APRA), this ratio has increased from an average of 26.9% to 54.8% in March this year. However, this increase does not reflect a material change in ‘bank profit’; it reflects a significant reduction in reported ‘bank income’.
The ratio’s big increase is purely statistical, not performance related.
One bank regularly reports income from a subsidiary on a ‘gross’ basis, whereas the other banks report this income type on a ‘net’ basis (net income simply means income minus expenses).
The recent market turmoil has significantly reduced this bank’s subsidiary’s ‘gross’ income, but because the subsidiary’s gross expenses figure has also reduced significantly, the net effect is negligible.
In other words, if the bank had been reporting1 ‘net’ income in this survey and the previous surveys, as the other banks have been doing, the ratio would not have increased like it did.
For further information:
Heather Wellard
ABA PR
P: 02 8298 0411
M: 0409 830 439
ENDS
[1] It should be stressed that this reporting method is allowable under APRA’s guidelines and in benign environments is unlikely to cause significant volatility. |
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