Bank profit margins recovering well
Return on equity for the banking sector increased to 13.2 per cent in the year to September 2010, a rise from an ROE of 10.4 per cent in the year to September 2009, APRA's latest overview of the industry shows.While the Australian Prudential Regulation Authority takes its time in compiling its quarterly overview (with a lag of around five months), the data is also the only comprehensive profile of a sector that faces increasingly sharp scrutiny over its profitability.The APRA data does not cover a long series (dating only from 2004) but it does show that the sector's returns, at least as at September 2010, were around four percentage points lower than their peak in the two years preceding the financial crisis.Banks that have reported for the December 2010 quarter, such as Commonwealth Bank, showed a further increase in returns and this trend is expected to continue as bad debt charges fall away. The APRA data also provides another, rarely cited, view of banks' profit margins.Most discussion of margins relates to the spread between a bank's cost of funds and the yield on it assets.In the APRA data, profit margin refers to a more conventional business definition - the net profit for the period divided by total operating income for the period.On this measure, banks' profit margins increased to 25 per cent in the year to September 2010, from 18 per cent in 2009. This ratio is also now only four percentage points shy of its peak in 2006 and 2007.