The Australian banking and finance sector is experiencing a notable boost in profitability, with recent data revealing significant growth in pre-tax profits, surpassing expectations and marking a post-GFC quarterly high.
According to the Australian Bureau of Statistics (ABS), the financial and insurance services sector recorded a pre-tax profit of $7.1 billion for the December 2024 quarter, a figure that sets a new benchmark for the industry in the wake of the Global Financial Crisis (GFC).
However, a deeper look into the figures raises some questions about how this surge is happening, especially considering the industry’s rising operational costs.
Data from the Australian Prudential Regulation Authority (APRA) for the September 2024 quarter highlights the steep price of running the Australian banking industry. The sector’s total operational expenses amounted to a staggering $103 billion for the year, a figure that has more than doubled over the past two decades. Despite this, the cost-to-income ratio (C/I ratio) for the industry stands at 52.2%, which, though high, represents an improvement from the 40s range a decade ago, with the figure once dropping as low as 41%.
One key point to consider is the sector’s ratio of personnel to operating expenses, which has steadily climbed to 59% over the past ten years. This ratio suggests that labor costs are becoming an increasingly dominant factor in the industry’s rising expenses.
Westpac’s economics team recently highlighted that the overall company profits across all industries, as reported by the ABS, exceeded expectations, rising by 5.9% in the December quarter. This growth was substantially above the market median forecast of 1.8% and even outstripped the highest forecast in the range, attributed to technical factors surrounding inventory measurement.
As the banking sector continues to experience robust profit growth, all eyes will be on the upcoming quarterly GDP data, set to be released by the ABS on Wednesday, to see how these trends are impacting the broader economy.
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