NEW REPORT ON HOW AUSTRALIAN BANKS COMPARE TO OVERSEAS BANKS AUSTRALIAN BANK PROFITS IN CONTEXT Sydney, 11 November, 2003:  The Australian Bankers’ Association (ABA) has released a report which outlines important facts about bank profits. To contribute to the public discussion about how Australian banks’ non-interest  income compares to international banks, the ABA commissioned Dr Kim Hawtrey[1] to develop a comprehensive report – “Banks’ non-interest income: an international study.”   The main findings of the report are: The average non-interest income of banks has risen around the world over the last decade, yet for Australian banks it has declined (see over graph 1). Components of non-interest income are fees from wealth management, financial market operations, households, small business and large business; The decline in non-interest income as a proportion of assets for Australian banks may be surprising for many because of the significant media attention given to increases in bank fees;[1] [2]  The growth in Australian non-interest income reflects increases in revenue from wealth management and financial market operations rather than retail banking fees from household, small business and large business; Australian home loan borrowers, small and large business borrowers, have been the main beneficiaries of the squeeze on interest rate margins. For such customers, fees paid have been more than offset by reduced interest costs; Fees earned by Australian banks for most of the past decade were below their international peer group, before catching up at the end of the period, bringing them into line with the world average; Australian banks’ overall profit margin has not risen [2] [3] during the past decade but by contrast the profitability of overseas banks has risen steadily eg Australia is ranked below the USA but similar to the UK; Australian banks have considerably improved their efficiency through reducing operating expenses which has enabled banks to maintain profitability levels despite declining interest income and revenue from non-interest sources; The cost ratio for Australian banks declined from 3.0 percent of total assets to 1.5 percent over the decade to 2001. In other words, they halved operating costs in the decade; (see over graph 2) By comparison, banks abroad lowered their expenses from 2.9 to 1.9 percent of total assets. Between 1994 and 1999, Australian banks had higher expenses compared to the international average, but in 2000 and 2001, this ratio fell considerably and is now well under the international average; (see over graph 2) The Australian banks had to reduce costs because their non-interest income is in decline (see over graph 1) and net interest income has also declined since 1994; (see over graph 3) David Bell, Chief Executive of the ABA, said: “It is very important that people understand the background and context to bank profits.”   “Australian banks are profitable institutions, not only within Australia but also when compared to banks overseas. The banking industry does not deny this fact.”   “Most importantly, however, Australian banks are critical to the returns of Australia’s superannuation funds – a $500 billion industry with around 14 million superannuation accounts. Banks make up around 25% of the Australian Stock Exchange’s capitalisation. Without strong returns from banks, people’s retirement incomes would potentially be much diminished. In addition, there are 1.5 million shareholders who invest directly in the banks.”      Dr Kim Hawtrey, author of the report, said: “Trends in Australian banks' profits can no longer be seen in isolation from the rest of the world, and this study shows that changes in how banks run their operations or set fees are in large part a reflection of new global realities being felt around the world.”   "In the face of significant global pressures on their business, banks have managed to maintain profitability, both by reducing operating costs through investing heavily in modern electronic customer delivery systems, and by meeting the needs of a strong local economy for loans and wealth management.”   For a copy of the report “Banks’ non-interest income: an international study, October 2003” by Dr Kim Hawtrey – please visit the ABA’s website: www.bankers.asn.au    Graph One     Graph Two   Graph Three   For further information: Heather Wellard ABA Public Relations Phone: 02 8298 0411 Mobile: 0409 830 439 ENDS [1] Dr Kim Hawtrey, Economist, Department of Economics, Macquarie University. [2] It should be noted that non-interest income includes a wider set of revenue than just bank fees and charges, but it is the largest component [3] Allowing for the unusual factors in 1992 and 1993 when banks were affected by the fall out from the recession and the bad loans of the late 1980s/early 1990s