Big banks profits creating winners and losers

The level of big four bank shares held by superannuation funds means that many Australians can count themselves winners from recent high levels of bank profitability, according to University of NSW associate professor, Mark Humphery-Jenner.

In an analysis published this week, Humphery-Jenner pointed to the record full-year profits of the major banks of nearly $32.5 billion, up 12.4% on the previous year and contrasted this to the mortgage stress being felt by thousands of Australian households.

However, he said that there are two sides to the story and pointed to the fact Institutions own around 23% of the shares of ANZ and Westpac, 18% of CBA, and 27.7% of NAB and 27.5% of Macquarie.

“The largest institutional shareholder across the big four banks is The Vanguard Group – both directly and in addition to funds it controls, as well as through holdings in other fund managers (such as BlackRock and State Street, which also hold significant numbers of shares in Australia’s major banks),” Humphery-Jenner said.

He notes that many of these institutions hold on behalf of ‘everyday Australians’.

“Thus, behind the institutional ownership is not a nameless faceless corporation, it is often ‘mum and dad’ investors,” Humphery-Jenner said while noting many retail investors own shares in the big banks due to the role of compulsory superannuation.

By contrast, in the US, institutions such as Vanguard Group own 72.4 per cent of global financial giant J.P. Morgan. This reflects a variety of factors, including the greater prevalence of custodial brokers in the US. But, nevertheless, Humphery-Jenner said this suggests that retail investors are more involved with Australian banks than they are with US banks.

A side note is that Australian banks are in a unique position, in that they are largely protected from significant competition, according to Humphery-Jenner.

“In the US there are thousands of banks. In Australia, there are a handful. Thus, banks must avoid abusing their clear market power,” he said.

The net result is that Australians both gain and lose from big bank profits, according to Humphery-Jenner.

“They gain through their superannuation and their stock holdings. After all, the big four banks will form a core part of any Australian superannuation fund.”

However, Australians “do lose” if they have a mortgage (or are looking to get one).

“Big bank profits deliver winners and losers. Many of the winners are everyday Australians. When people criticise bank profits but also want their superannuation to grow, they should consider whether they are implicitly criticising themselves: you can’t have it both ways,” Humphery-Jenner said.