Treasury sets conditions for 15 per cent bank profits
Ken Henry, Treasury Secretary, posed the key question in a talk to an industry conference yesterday: "Is a 15 per cent post-tax rate of return on equity too high or too low?"Fifteen per cent is the 18-year average profit of banks during the period since they, and Australia, clambered out of the last recession.This level is similar to the return of other major companies listed on the Australian Stock Exchange and banks in other countries prior to the global financial crisis, he said.This rate of profit could continue, Henry suggested, but with conditions."One way of answering that question," he said, "is to say that it cannot be regarded as too high if the industry is sufficiently competitive; if the provision of banking services is sufficiently contestable. "And that is one reason why there is so much focus on banking competition."Henry noted that one measure of competition in banking - the net interest margin - is increasing, which means competition is lessening."Where competition is increasing, net interest margins will fall, all else being equal," he said in his talk to the Australian Banking and Finance Conference, held in Sydney."[Yet] over the last two years, the net interest margin has increased from two and a quarter percentage points to two and a half percentage points - back to 2005 or 2006 levels."This year, 2010, is closing on an interesting note. The Government, through its weekend policy package as well as Ken Henry yesterday, is spelling out to the industry and the public the terms of the latest bargain between the government of the day and the banks.