The banks have recently announced large profit gains, the latest being Westpac with an 85% profit lift to $6.35 billion.

Following the Reserve Bank’s announcement of a 25 basis point increase in the official cash rate the CBA lifted it’s variable home loan rate by 45 basis points, a move that was met by howls of protest from postulating politicians and media commentators. At the writing of this article ANZ had also just announced an increase of 39 basis points, a 14 point premium on the Reserve’s official lift and NAB and WBC will likely follow suit.

But how short our memory is! Following the collapse of US investment bank Lehman Brothers and the subsequent carnage of global credit markets and threatened sovereign debt defaults, Australia’s major banks were four of only eight banks that held an AA credit rating. Our banks managed to survive the GFC with minimal damage although suffered an impact to their profitability; nevertheless we can all be grateful that the Australian economic system survived the crisis better than most - partially due to responsible regulation and a lot due to good management by the banks who had little exposure to sub-prime loans.

Put into context as a percentage return on shareholder funds, bank profits are not nearly as obscene as has been made out and coming off a low base due to profit falls in 2008-9.

In the case of Westpac, a large proportion of its profit increase was derived from a one off tax benefit resulting from the St George takeover. Furthermore, the banks were forced to allocate huge sums for potential writedowns of bad debts, many of which have not eventuated allowing them to bring the cash back into their P&L. But of course this detail was ignored by our pollies and the media ’shock jocks’. Then there is the problem of tight money supply and cost of global funding, a lagging factor of the GFC and a barrier to bank lending - particularly in the corporate sector.

Frankly, I applaud the banks for keeping us safe from harm and support their right to make an appropriate margin on their cost of funding. In reality, the pollies have no control whatsoever over private enterprise banks and would achieve a far better result for us all by using their influence to free up the global money supply thus reducing the cost of funding so the banks could lower their interest rates. Other options available include introducing a Government backed alternative or legislating to stop bank exit fees. But then, that wouldn’t get a headline would it?

Andrew Hewison is Director and a Certified Financial Planner with Hewison & Associates Wealth Management.

Level 4 / 102 Albert Road, South Melbourne
Ph: 9682 1900 | www.hewison.com.au