Profit debate takes place at the margins
That profits were rising recently, and to healthy levels, is one detail in the banking debate that may be best acknowledged rather than recast in the confusing wrangle over measuring margins.Return on equity for all banks increased to 15.3 per cent in the June 2010 quarter, from 10 per cent in the March quarter, according to data published by APRA, in its quarterly pack of banking statistics.From a post-GFC low in quarterly returns of 4.5 per cent in September 2009, banks have now clocked up three-quarters of double digit returns, two of them around 15 per cent.September 2010 quarterly profits for some banks were, in some, cases even better than this, so rising profit margins are a central feature of the banking story.Those margins may well be under challenge - as banks say.The Australian Bankers Association and also Ralph Norris, CEO of Commonwealth Bank have taken issue with the analysis by the Australia Institute of APRA's data on margins. (This analysis received prominent coverage in the Sydney Morning Herald and The Age yesterday).The ABA questioned the Australia Institute's methodology in looking at margin trends over the last year, which, according to the ABA, "involves a simple but fundamental mathematical error. "It has effectively assumed that the difference in the average cash rate in June quarter 2010 and the average cash rate in June quarter 2009 applies for the full year."The CBA's Ralph Norris made the same point at a business lunch yesterday."The issue in regard to the numbers that have been produced by the Australia Institute [is that they] are based on averages, I understand."We've asked them for their methodology, so we can look at it, but if you work on averages you have a situation where you have a starting point there and an end point there."You have a situation where you take the average, where you draw the line in the middle. So the situation with regard to climbing rates is they climb on a linear basis, they don't climb on an average basis."The executive director of the Australia Institute, Richard Dennis, told ABC News he stands by the analysis."The reality is when the official interest rate goes up millions of people with mortgages see their interest rates increase almost immediately."Now, the fact is banks have got lots of sources of funding, some of it short-term, some of it long-term, and they're increasing everybody's interest rate almost instantly even though only some of their funds are becoming more expensive as of that day."So, if anyone is concealing the difference between what's happening in the average and what's happening at the margin, I suspect it might be the banks."