Profits: looking behind the headline number

This week,  the CEOs of the four major banks have been grilled by the House of Representatives’ Standing Committee on Economics, with politicians demanding  to know why Australian banks have higher returns on equity (13.8% ROE)  and profits than those in other Western countries and whether this is due to their market power. This appears to be both an exercise in political point-scoring and data mining, in that I strongly doubt that it would be in the national interest if the Australian banks generated the returns of the European Banks (4% ROE excluding Deutsche Bank). Weak returns limit internal capital generation and increase financial precariousness and thus the risk of taxpayer funded bailouts. Indeed if one looks at a more comparable and similarly structured banking market such as Canada (ROE 14.8%), that has five dominant trading banks, in a highly regulated market; shareholders could make the case that the Australian bank CEOs are not trying hard enough to generate profit!

In this week’s piece we are going to look at different measures of corporate profitability for large Australian listed companies, looking beyond the billion dollar headline figures that have spell bound our politicians.

Read more here.

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