All four of Australia’s big banks have posted substantial profits for the 2022-23 financial year.
Commonwealth Bank made $10.2b, NAB $7.7b and ANZ and Westpac $7.4b each, according to recently-published annual reports.
In all four cases, the profit was larger than last year. Why are the big banks so profitable?
The simple answer is that all four banks have benefited from higher interest rates.
The Reserve Bank of Australia has been ‘raising interest rates’ since May 2022 to discourage borrowing and spending, motivated by a desire to slow down the rate of rising prices (inflation).
When we talk about ‘raising interest rates’, what we actually mean is that the RBA is increasing the ‘cash rate’ — the rate it charges banks for short-term loans.
The RBA hopes banks will ‘pass on’ this higher rate to its customers.
However, it is up to banks whether they do so.
In general, Australia’s largest banks have been more willing to pass on higher rates to borrowers (e.g. mortgage holders), and less willing to pass on higher rates to savers.
Banks make money from the interest they charge borrowers and lose money by paying interest to savers, so this decision has boosted their profits.
All four banks charge higher rates to borrowers overall than they offer to savers.
For NAB and ANZ, borrowing rates are about 1.7 percentage points higher. For Westpac and CBA, they are about 2 percentage points higher.
‘Percentage points’ is a direct comparison between two numbers — so, for example, it might mean a borrowing rate of 6% and a saving rate of 4%.
All four banks increased the size of the gap between borrowing rates and savings rates in 2022-23.
In all four cases, this resulted in over $1 billion of extra ‘net interest income’ — that’s the difference between interest received from borrowers and interest paid to savers.
For all four banks, this extra income accounted for a significant portion of the spike in profit.