David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Business leaders never like being called up before lawmakers to answer for their sins. But Australian bank executives should be grateful for the way their feet are being held to the fire in Canberra this week.

There are numerous allegations leveled against the country's big four lenders -- Commonwealth Bank, Westpac, ANZ and NAB. They're a cozy cartel that fail to pass on interest rate movements to borrowers or depositors. They're a bunch of predators using sharp practice and giving improper financial advice to clients. They've been rigging the country's key interbank interest rate. Their executives are paid too much.

The so-called "four pillars" policy, which prohibits mergers between the big four lenders, certainly makes it look like the banks are an oligopoly that makes profits by limiting competition. A look at their financial statements, though, suggests a rather different picture.

Take net interest margins. As the difference between what banks earn on their advances and pay for their borrowings, this measure is a decent proxy for how fiercely lenders are fighting to win loans and deposits. When competition declines, net interest margins should rise -- but in Australia, as in most other markets, they've been falling for years

Listen to the Money Talk
Median net interest margins of large banks, by country
Source: Bloomberg
Note: Only companies with at least $1 billion in annual revenues have been included.

Right now, margins are well below the U.S., and not dramatically above those found in Singapore, Hong Kong and the U.K.

Keep looking at Australia's banks through the lens of interest income and their real oddness comes into clearer focus. The margin on banks' lending has certainly been declining, but volume growth remains strong. That means that while most of the world's big banks have seen net interest income fall or barely increase over the past five years, Australia's big four have enjoyed a boom:

Give Some Credit
Five-year change in net interest income by major banks
Source: Bloomberg

Net interest income now makes up between two-thirds and three-quarters of total earnings for the Australian banks, compared with around half elsewhere in the world:

Clipping the Ticket
Net interest income makes up a bigger share of the total at Australian banks than elsewhere
Source: Bloomberg
Note: Most recent fiscal year figures. Measured as net interest income as a percentage of net interest income plus non-interest income.

The popular image of Australia's banks is of devious businesses that make their money from cheating their insurance and financial advice customers. The truth is rather different: Such fee income is an unusually small proportion of the total.

To the extent that banks have done well in recent years, it's because they've been passively lifted toward higher profits by a rising tide of mortgage borrowing. That's reminiscent of Donald Horne's characterization of Australia itself as "a lucky country, run mainly by second-rate people who share its luck."

Safe as Houses
Australian banks have squeezed the competition out of the mortgage market. Value of housing finance commitments for owner-occupied properties, monthly
Source: Australian Bureau of Statistics
Note: Trend figures.

The luck may finally be running out. Home loan growth has slowed and rents are rising at the weakest pace in "some decades," Reserve Bank of Australia Governor Phil Lowe said in a monetary policy statement Tuesday, keeping rates on hold at a record-low 1.5 percent.

Median house prices in Sydney will fall over the next two years at the fastest pace since at least 2000, according to a report last year for QBE, one of the country's two biggest providers of mortgage insurance. In real terms, they'll likely decline from 2015 to 2018 in Melbourne, Perth, Adelaide and Darwin as well, while apartment prices will drop in nominal terms in all major cities barring Brisbane.

A world in which Australia's big four can't depend on the housing market to deliver profits is one in which management will need to devote much more time to the tricky business of making money from non-loan businesses such as financial advice, funds and wealth management, insurance, trading and investment banking.

As the welter of scandals being picked over this week in parliament demonstrates, that attention has been lacking in recent years. By shifting executives' focus, Australia's politicians could wind up doing the big four banks a favor.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. This is particularly striking given that while most central banks have stuck interest rates at or close to zero in recent years, the Reserve Bank of Australia has been in an easing cycle. That's been reducing banks' short-term funding costs relative to their longer-term interest income -- a dynamic which should, if anything, be making margins higher than they'd otherwise be.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at