Super profits like CBA’s $10.2bn one are a bit naughty, but also nice

A bank that makes a too-big profit, and the CBA does not, is still a far more desirable reality than a bank that makes a too-small profit.

The CBA profit might have been – just a little bit – naughty, but it was also nice for everyone. Picture: NCA Newswire/ Gaye Gerard

The bottom line – that $10bn and a bit profit – is that, yes, the CBA used the Reserve Bank rate rises to benefit the bank, and its shareholders, and not its customers. That’s, importantly, BOTH depositors and borrowers.

But it did not amount to out and out gouging.

In large part, it was “just what happens” when rates go up and go up as quickly as they did, especially in the second half of 2022.

The rates charged most borrowers – the ones with variable rate home, and business, loans, get put up immediately.

But the rates paid to depositors are stickier.

It’s not just that the CBA – and obviously, all the banks - take a ‘little’ longer to put their deposit rates up, and usually by not quite as much as they put their lending rates up.

But it’s also just the reality that much of the deposits are on fixed terms. Their rates only go up when the terms expire.

It’s not exactly surprising that the CBA didn’t write to someone with a two-year term deposit maturing in. say, January 2024, and say: out of the goodness of our corporate banking heart, we are nevertheless going to increase the interest rate we are paying you, and increase by ALL those RBA rate rises.

The way this plays out is that, inevitably, what’s called the bank NIM or Net Interest Margin – the difference, across the bank, between what is charged ALL borrowers and paid to all depositors – goes up.

In the CBA’s case it leapt from 1.9 per cent to 2.07 per cent.

That’s to say, it was borrowing all its money at around 3 per cent and lending it out at just shy of 5.1 per cent.

Again, that gap might sound a lot. But out of that difference has to be paid all the costs of running the bank, covering for bad debts, and then what’s left – the $10bn – is the profit for the bank and its shareholders.

Three points.

Back in the mid-1990s – the last time inflation was running as high as it is today – all the banks had NIMs of closer to 4 per cent than the CBA’s latest 2.07 per cent.

That was before we got real competition in banking. And also because of the inflation – another very good reason why we need to get inflation back below 3 per cent.

Second point. As we got into 2023 and even though the RBA kept lifting rates, the rates paid to depositors not only caught up with but ran a little ahead of the rates charged borrowers.

In the first half – the December half – CBA’s NIM was 2.1 per cent. In the second half – the June half – it dropped to 2.05 per cent.

Third point. $10bn sounds like a huge, even humungous number. But heck, the CBA is a big bank, a very big bank, easily the biggest bank in Australia.

The CBA has around $800bn of loans. It makes $10bn net profit on them. That’s barely $1 per $100 of loan. If just one loan goes bad it can tear a huge hole in its profitability.

Trust me: a bank that makes a too-big profit (and the CBA does not, or only just nudges, into that category) is still a far more desirable reality than a bank that makes a too-small profit, teeters or goes over the cliff.

Indeed, you don’t have to trust me. Just look at what happened in America when banks started going broke last March.

Depositors faced losing their money; and it wasn’t going to be too flash for borrowers.

That is, until the US Government stepped in and used taxpayer money to paper over the cracks.

Yes, the CBA profit might have been – just a little bit – naughty, but it was also nice. For everyone.