The World's Most Profitable Banks Leave Australian Lenders Behind

(Bloomberg) -- After years jockeying with Canada for the title of the world's most profitable banks, an ugly earnings season has seen Australia's big lenders slide down the global rankings.

Based on return-on-equity, a key measure of profitability, Australia's banks have fallen below Singapore and the U.S. for the first time in at least nine years, according to data compiled by Bloomberg.

The slide down the rankings is a stark illustration of the banks' fall from grace after a torrid year marked by a scathing report into years of misconduct, executive departures and declining earnings.

Meantime, U.S. banks have recovered from the scars of the financial crisis, and, helped by buoyant stock markets and corporate tax cuts, are on track to break their 2018 record-earnings high.

And while Singapore banks are facing their own squeeze as the export-reliant economy stagnates, returns from their wealth management businesses have enabled them to leapfrog Australia.

In top-of-the-table Canada, the growth of wealth management and their U.S. operations have insulated lenders from cooling domestic demand.

Back in Australia, the future looks bleaker for a banking sector that swerved the financial crisis, and for the following decade seemed impregnable to the turmoil roiling the global finance industry.

That all changed with the inquiry into financial industry misconduct, which landed the banks with billions of dollars in customer compensation costs, accelerated the exit from wealth management and emboldened regulators to take tougher enforcement action on wrongdoing.

On top of that, the central bank has cut interest rates to record lows, squeezing margins, and consumer confidence is sliding as the economy slows.

No Sugarcoating

“Out-performance versus international is mostly behind us short-term,” Morgan Stanley asset allocation strategists wrote in a note to clients earlier this week. “One major implication from the resumption of monetary easing in Australia is to lower the profitability of the banks.”

Not even bank chiefs are trying to sugarcoat things.

“Banking is clearly going through a once-in-a-generation transition,” Westpac Banking Corp. Chief Executive Officer Brian Hartzer told analysts Monday as the lender posted its first profit decline in a decade.

Westpac's return on equity plunged 225 basis points to 10.75% in the fiscal year ended Sept. 30, well below its long-held target of about 13%-14%.

Australia & New Zealand Banking Group Ltd. CEO Shayne Elliott also struck a downbeat note as the lender's earnings stagnated. “Revenue is going to be tough to come by,” he said Oct. 31. “Growth is going to be moderate, if any.”

National Australia Bank Ltd. said Thursday return on equity fell 180 basis points to 9.9% last year as profit slumped on hefty customer-compensation charges. Interim CEO Philip Chronican said banking profitability had taken a hit from the combination of extremely low credit growth and interest rates coming at the same time as misconduct costs. “How long the current period goes on for is something I don't think any of us can be certain of,” he said.

Investors have taken notice. Just 9% of global equity fund managers have any exposure to Australian banks, the lowest proportion in at least eight years, according to analysis from Auckland-based Copley Fund Research. That's down from a high of 22% in 2013, said Copley, which monitors funds that manage a combined $1.2 trillion.

“Australia stands out because of the total lack of investment,” said Copley Fund Research CEO Steven Holden. “It's been a casualty of better options elsewhere.”

To contact the reporter on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Peter Vercoe, Russell Ward

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