Our stand is that despite the four banks having a lot of power within the banking industry, it has proved to be beneficial for the economy, especially during the global financial crisis in 2008. This will once again be expounded later in the report. 1. Introduction The four major banks are one of the largest entities in Australia and make up a significant percentage of market share in the Australian banking industry. However, this may give rise to the problem of holding too much market share.
The main purpose of this report is to determine if the big 4 banks hold too much power in the banking industry, and how the amount of market share controlled by each of the big bank affects the competition amongst the banking industry and ultimately profitability of each bank. 1. 1 Australian Banking Industry 1. 1. 1 Major Banks / Four Pillars The Australian banking sector is currently dominated by four major banks: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.
The “big four” banks are in fact in the world’s top 12 banks, due to recent collapses of large banking corporations. The top four banking groups in Australia ranked by market capitalisation at share close price 5 July 2011: Rank| Company| Market capitalisation| 1| Commonwealth Bank| A$79. 86 billion| 2| Westpac Banking Corporation| A$65. 62 billion| 3| Australia and New Zealand Banking Group| A$56. 25 billion| 4| National Australia Bank| A$54. 54 billion| Source: Australian Banking Association 1. 1. 2 Regional Banks, Credit Unions & Building Societies
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Competitors of the major banks include smaller and often regional banks, as well as credit unions (mutuals) & building societies. Some of the regional banks are Bendigo and Adelaide Bank, Suncorp-Metway Bank of Queensland and ME Bank. 1. 1. 3 Foreign Banks Foreign banks that wish to carry on banking business in Australia must obtain a banking authority issued by APRA under the Banking Act- either to operate as a wholesale bank through an Australian branch or to conduct business through an Australian-incorporated subsidiary. Australian Bankers’ Association, 2011) The foreign banks used in this report are Arab Bank Australia Limited, BA Australia Ltd, Bank of China (Australia) Ltd, Beirut Hellenic Bank Ltd, BNP Pacific (Australia) Limited, BOS International (Australia) Ltd, Citigroup Pty Limited, Credit Suisse Equities (Australia) Limited, Deutsche Australia Ltd, HSBC Bank Australia Limited, ING Bank (Australia) Limited, Investec Bank (Australia) Limited, JP Morgan Securities Australia Limited, Rabobank Australia Limited, RBS Group (Australia ) Pty Limited, Sumitomo Mitsui Finance Australia Ltd. UBS(Sydney) Ltd, UBS Australia Limited, UBS Private Clients Australia Ltd, and UBS Securities Australia Ltd. Foreign banks that do not wish to obtain a banking authority in Australia may operate a representative office in Australia for liaison purposes, but the activities of that office will be restricted. According to the Foreign Investment Review Board, foreign investment in the Australian banking sector needs to be consistent with the Banking Act, the Financial Sector (Shareholdings) Act 1998 and banking policy, including prudential requirements.
Any proposed foreign takeover or acquisition of an Australian bank will be considered on a case-by-case basis and judged on its merits. There are a number of foreign subsidiary banks, however only a few have a retail banking presence; HSBC Bank Australia, Bank of Cyprus Australia Limited, Beirut Hellenic Bank and Citibank Australia have a small number of branches. Foreign banks have a more significant presence in the Australian merchant-banking sector (Australian Bankers’ Association, 2011).
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1. Competition in the Australian Banking Industry: Four Pillars Policy & the ACCC The Australian Competition & Consumer Commission(ACCC) is the competition regulator that promotes competition and fair trade in markets to benefit consumers, businesses, and the community (Australian Competition & Consumer Commission, n. d. ) The Four Pillars Policy is an Australian Government Policy that supports competition by preventing mergers between the major four banks, at the same time preventing foreign bank takeovers (Australian Bankers’ Association, 2011).
Australian Treasurer Wayne Swan strongly supports this policy, stating that it was “the cornerstone of a financial and banking system that was one of the very best in the world. ” (The Daily Telegraph, 2012).
According to Durie & Gluyas (2009), Australian Competition and Consumer Commission chief Graeme Samuel further reinforces the merits of this policy and is strongly against mergers of the major banks.
The Four Pillars Policy not only helped to maintain a competitive local market, it also prevented banks from expanding, where it might lead to the creation of “national champions” that could compete with major global financial institutions (News Limited, 2012).
2. Performance Indicators 2. 1 Market Share The big 4 banks has an average market share of about 20 percent with NAB holding the highest amount of market share each year. This can be seen from the graph below.
In comparison, the regional banks have an average market share of about 7%, while foreign banks have an average market share of 6%, and credit unions only holding average market share of 0. 5% (See Appendix I, pg. 24).
Compared to the regional and foreign banks and credit unions, it is certain that the four major banks hold a significantly higher percentage of market share. However, the four major banks are still profit-oriented financial institutions with a common goal of maximizing their shareholder’s wealth.
Hence, for them to hold a significant amount of market share is good for them as a financial institution (See Appendix II, pg. 24).
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2. 2 Three-Bank and Five-Bank Concentration Ratios The 3-bank and 5-bank concentration ratios measures the percentage of market share held by the 3 and 5 largest banks in the banking industry. This can be calculated by adding the market share of the top 3 and top 5 banks of the banking industry. The fifth bank considered is Suncorp-Metway, and this data is based on the financial survey of regional banks by KPMG.
During the global financial crisis from 2007-2008, there was a significant decrease in both the 3-bank and 5-bank concentration ratio. However, the market started to pick up during the period leading up from 2008-2009, with the concentration ratios for both 3-banks and 5-banks peaking during 2011 as shown in the graph below. The 3-bank ratio shows medium market concentration with the figures ranging from about 69% in 2008 to about 77% in 2011. This means that the top 3 banks are still fairly competitive.
However, the 5-bank concentration ratio shows high market concentration, with the lowest figure being 92% in 2008 during the GFC, and then progressively increasing to its peak of 100% in 2011. This means that there was a possibility of a monopoly in the Australian banking industry by the 4 major banks and Suncorp-Metway over the time period of 2006-2012. 3-bank Concentration Ratio Calculations 2006: (23. 34+21. 16+30. 85)100? 100=75. 35 2007: (23. 45+20. 93+30. 59)100? 100=74. 97 2008: (20. 98+20. 24+28. 26)100? 100=69. 48 2009: (24. 15+25. 25+22. 76)100? 100=72. 16 2010: (24. 73+26. 5+23. 66)100? 100=74. 64 2011: (24. 44+27. 58+24. 52)100? 100=76. 54 2012: (24. 23+25. 74+22. 77)100? 100=72. 74 5 Bank Concentration Ratio Calculations 2006: (23. 34+21. 16+30. 85+18. 95+3. 64)100? 100=97. 94 2007: (23. 45+20. 93+30. 59+20. 12+4. 51)100? 100=99. 60 2008: (20. 98+20. 24+28. 26+18. 92+4. 08)100? 100=92. 48 2009: (24. 15+25. 25+22. 76+18. 42+3. 76)100? 100=94. 34 2010: (24. 73+26. 25+23. 66+20. 35+3. 65)100? 100=98. 64 2011: (24. 44+27. 58+24. 52+21. 75+2. 24)100? 100=100. 53 2012: (24. 23+25. 74+22. 77+21. 66+2. 10)100? 100=96. 50 2. 3 Herfindahl-Hirschman Index (HHI)
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The HHI is a measurement used to understand the level of concentration that exists within a market or industry, as well as give an indication of the distribution of market share across the companies included in the index (APRA).
The market shares that we used in the calculation of our HHI is from our data of the four major banks and four regional banks. HHI is commonly used to assess the level of concentration in an industry as it indicates the level of concentration and distribution of market share within an industry. HHI can be calculated by summing the squared market share of each firm in the relevant market.
When HHI is between 1000 to 1800 points, it is an indicator of a moderately competitive market. When the HHI is higher than 1800 points, it indicates a highly competitive market, whereas an HHI of less than 1000 points indicates a competitive market. Based on the data in the graph below, the Australian banking industry can be said to be highly concentrated as it has a HHI of at least 2000 from year 2006-2012. As shown in the graph, there is a significant decrease in market concentration from 2007-2008 as the impact of the global financial crisis began to affect the global economy, with the HHI index falling from 2499 to 2029.
During the period of 2008-2009, there was an acquisition of Bankwest by Commonwealth Bank of Australia, and St George bank by Westpac. These 2 acquisitions played a part in contributing to the rise in the HHI index from 2008-2010. Herfindahl-Hirschman Index Calculations 2006: (0. 2334)2+(0. 2116)2+(0. 3085)2+(0. 1895)2+0. 0992+0. 0962+0. 08632+(0. 0364)2=0. 2581 2007: (0. 2345)2+(0. 2093)2+(0. 3059)2+(0. 2012)2+(0. 0107)2+0. 0912+0. 08112+(0. 0451)2=0. 2499 2008: (0. 2098)2+(0. 2024)2+(0. 2826)2+(0. 1892)2+(0. 0129)2+(0. 0207)2+(0. 0005)2+(0. 0408)2=0. 2029 2009: (0. 2415)2+(0. 2525)2+(0. 276)2+(0. 1842)2+(0. 0131)2+(0. 0182)2+(0. 0009)2+(0. 0376)2=0. 2097 2010: (0. 2473)2+(0. 2625)2+(0. 2366)2+(0. 2035)2+(0. 0148)2+(0. 0200)2+(0. 0022)2+(0. 0365)2=0. 2294 2011: (0. 2444)2+(0. 2758)2+(0. 2452)2+(0. 2175)2+(0. 0146)2+(0. 0201)2+(0. 0032)2+(0. 0224)2=0. 2444 2012: (0. 2423)2+(0. 2574)2+(0. 2277)2+(0. 2166)2+(0. 0141)2+(0. 0193)2+(0. 0040)2+(0. 0210)2=0. 2248 2. 4 Net Interest Income (NII) & Net Interest Margin (NIM) Net Interest Income (NII) is the difference between revenue generated from a bank’s assets and the expenses associated with paying out its liabilities. Investopedia, 2012).
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Net Interest Margin (NIM) examines how successful a firm’s investment decisions are compared to its debt situations (Investopedia, 2012).
It is also known as the ratio of net interest income to invested assets. NIM is calculated by taking the interest income minus interest expense divided by earning assets (Lange, Saunders & Cornett, 2013).
Both NII and NIM are performance indicators used by banks, which are useful for banks’ planning in distinguishing potential changes under different nterest rate scenarios (Lange, Saunders & Cornett, 2013).
In this case, we will use NIM as the preferred performance indicator, where it is expressed as a percentage of average interest-earning assets. (See Appendix III, pg. 24) According to the graph, we can see that there is a considerable rise in NIM for both major banks and credit unions/mutuals over the period of 2006 to 2012. This shows that the investment strategies of major banks and credit unions were more successful as compared to regional banks.
This could likely be because the effects of competition and global financial market developments have brought about a considerable change in banks’ lending rates and funding costs over the years. (Reserve Bank of Australia, 2013) For example, there may have been a decrease in price competition among the major banks in relation to housing and business loans in recent years. This would have led to a rise in their NIM from 2009-2012. Therefore, we can deduce that there is an inverse relationship between competition and NIM.
As for the regional banks, the decline in NIM since the GFC could be due to their higher funding costs, as asserted in (Reserve Bank of Australia, 2013) 2. 5 Profitability 2. 5. 1 Return on Average Assets (ROAA) Return on Average Assets (ROAA) is an adjusted version of the Return on Assets (ROA) measure of company profitability. It is an indicator used to assess the profitability of a firm’s assets and is calculated by taking net income and dividing by average total assets (Investopedia, 2012).
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ROAA also displays how efficiently a company is utilizing its assets.
It is useful for investors in assessing the financial strength of a company and its efficiency in utilizing its resources. (See Appendix IV, pg. 25) From the graph, a downward trend in ROAA can be observed from the period of 2006 to 2012, with the least percentage of ROAA in 2009. This could be due to the Global Financial Crisis from 2007 to 2009 which majorly impacted the Australian banking industry, causing a drop in ROAA amongst banks. From 2008-2012, the major banks generally had a higher ROAA than regional banks and credit unions/mutuals (with the exception of 2006 and 2007).
This indicates that the major banks have the highest profitability of its assets and highest overall operating efficiency, thus proving that they are financially stable and are very efficient in utilizing its resources. 2. 5. 2 Return on Average Equity (ROAE) Return on Average Equity (ROAE) is an adjusted version of the Return on Equity (ROE) measure of company profitability, where the denominator, shareholders’ equity, is changed to average shareholders’ equity. It is calculated by adding the equity value at the beginning and end of the year, divided by two (Investopedia, 2012).
See Appendix V, pg. 25) From the graph, a similar downward trend in ROAE is evident during the period of 2006 to 2012, with the lowest values in 2009. This could again be caused by the 2007-2009 Global Financial Crisis, where it resulted in a decrease in ROAE amongst Australian banks and an overall decline in shareholders’ wealth. Also, it is observed from the graph that major banks generally had a higher ROAE as compared to regional banks and credit unions/mutuals. This indicates that the major banks are more efficient in providing the highest return to its shareholders. 3. Conclusion
Even though it is evident from our findings that the major banks have too much power and possesses high market concentration, this also means that the degree of competition is lower as the higher the market share, the higher the possibility of a monopolistic industry. However, having a monopolistic banking industry where the industry is controlled by the major banks has been beneficial to the economy. A monopolistic industry help to lower information costs for the consumers due to economies of scale, and this wastage of resources also means that they are more efficient, meaning higher productivity levels.
Due to the fact that they make a large amount of profit, this can be invested in Research and Development to bring further benefits to the economy, as well as maintain their status as the four big banks of Australia. Also, they are ultimately financial institutions who aim to maximize their shareholder’s wealth, hence, it is natural for them to continually have a hold on a significant amount of market share. The implementation of the four pillars policy kept the economy healthy even through the poor economic conditions during the Global Financial Crisis in 2008.
This was due to the fact that the four major banks held such a large market share in the banking industry, such that it helped cushion the impact of the GFC on the Australian banking industry. Keen competition amongst the banks boosts efficiency, and the higher the efficiency levels, the higher the profits as greater efficiency results is less wastage of resources and higher productivity levels 4. Bibliography Australian Bankers’ Association. (2011).
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