The Big Four banks are hurtling to a record $33bn profit this year fired by billions in risk free Pandemic aid. Callum Foote checks out the latest profits for Westpac, NAB, CBA and ANZ – and the TFF effect.
Commonwealth Bank earned a record $5.1 billion profit for the second half of 2022. NAB recorded $2.15 billion for the fourth quarter of 2022. Both results were a quarter of a billion dollars higher than expected for the fourth quarter. A good deal of it is thanks to Covid era subsidies.
Analysis shows that 13% of Commbanks profits, and 10% of NAB’s this past reporting period came from what we at Michael West Media are calling the term funding facility to exchange settlement account program.
Inflation bites, corks pop
While ordinary Australians are beset by higher living costs brought on by inflation and rising interest rates, the big banks are raking in record profits.
Australia’s big four banks are among the most profitable in the world when profits are compared to GDP.
UBS forecasts reveal that the big four expect to earn a combined profit of $33.5 billion in the 2023 financial year. This is an increase on the $28.5 billion earned in 2022 and if realised would make this year the most profitable year on record for the big four.
The previous record was set in 2017, when combined profits exceeded $31 billion.
The joys of the Pandemic
The Term Funding Facility (TFF), a pandemic response measure, provided for much of these greater-than-expected profits.
The aim of the Term Funding Facility (TFF) was to provide the banking sector with enough cash to continue to lend to households and businesses at lower borrowing rates, and to stimulate the economy through the Covid lockdowns.
In total, $188 billion was loaned to Australian deposit-taking institutions of which the big four banks drew down the lion’s share – approximately 70% of the total amount.
Of the big four, CBA took the most at $51.14 billion, with NAB coming in second with $31.87 billion.
As MWM has previously found, Australian banking institutions have been piling a lot of money into the Reserve Bank of Australia’s exchange settlement accounts.
The RBA’s exchange settlement accounts were originally, and still are, used to cover overnight interbank payments. In other words, these accounts are what Australian banks use to settle transfers between each other, with the RBA acting as a clearing house.
As such, banks traditionally only required a small amount of funds in their ESAs, approximately $2 billion before the pandemic.
The interest paid on the exchange settlement accounts is also a mechanism that the RBA uses to control interest rates.
When the RBA raises the interest rate target to counter inflation, it also raises the interest it will pay on money held in its ESAs at the same time.
The interest that the RBA pays on the funds held in its ESAs is tied to the cash rate target and as such was 0% until the RBA decided to raise interest rates in May last year.
There is now more than $443 billion held in the RBAs exchange settlement accounts, paying out approximately $14.4 billion a year in risk-free interest to banks operating in Australia.
According to analysis obtained by MWM, in the fourth quarter of 2022 Commonwealth Bank earned $340 million from the money it took from the TFF and placed in its exchange settlement account with the RBA.
This is net profit, i.e. the interest earned on borrowed funds in the exchange settlement accounts less the cost of borrowing those funds from the TFF
The TFF-ESA program contributed significantly to Commonwealth’s $250 million higher-than-expected fourth-quarter earnings.
Likewise, NAB earned $250 million more than expected from the money it took from the TFF and placed in its exchange settlement accounts at a profit of $210 million.
Questions put to each of the big four banks
- How much does your bank hold in the RBA’s exchange settlement accounts?
- In the last reporting period, how much interest did your bank earn on the funds held within your ESA?
- How much did your bank drawdown from the Term Funding Facility?
A Commonwealth Bank spokesperson replied that the bank’s disclosable information on the TFF and ESA is contained in information provided to ASX and their profit announcement.