Stephen Long reported this story on Wednesday, August 11, 2010 18:42:00

MARK COLVIN: The Commonwealth Bank today announced a record yearly profit of more than $5.6 billion.



A strong result for shareholders but it has sparked a debate about just how much profit is acceptable.



A left-leaning think tank has called for a super profits tax on banking.



A consumer group has called for the Government to intervene as it has in the broadband market to create a "broadbank" for consumers.



And critics, from the left to right, are bemoaning a decline in competition in the industry.



Economics Correspondent Stephen Long



STEPHEN LONG: Here's the question: We know after the GFC that push come to shove, governments won't let banks fail; certainly not the big important ones.



Here and around the globe, governments stepped in to rescue banks by guaranteeing their debt, so they could borrow in the global markets.



So, given that banks are essentially underwritten by the state and the taxpayer, what's a reasonable level of profit?



Is $5.66 billion too much?



That's Commonwealth Bank's net profit, up 20 per cent. Their preferred measure, cash profit, was even bigger at $6.1 billion.



Chief executive Ralph Norris could credibly claim the bank is serving its shareholders.



RALPH NORRIS: We delivered for our shareholders, by raising the final dividend by 55 cents, to $1.70, an increase of 48 per cent.



STEPHEN LONG: But do profits so large serve the public, customers and the wider community?



RICHARD DENNIS: The underlying profits of Australian banks are so large that in effect $3 out of every $100 earned in Australia is the underlying profits of the Australian banks.



STEPHEN LONG: Richard Dennis, the executive director of the Australia Institute



RICHARD DENNIS: For every $100 earned in Australia, $3 of that is accounted for by the underlying profits of bank shareholders.



So, we need consumer protection, we need to reign in the fees and charges. At a structural level, I think the government should look more seriously about how it can drive the government's own business and other business into some of the competitors, and frankly if we can't do something through well-designed regulation, the idea of a super profits tax for banks makes enormous sense; these are super profits.



STEPHEN LONG: A tax unlikely to be supported by the Coalition.



But the shadow Treasurer, Joe Hockey, found himself strangely echoing some of the views emanating from the left-wing think tank.



JOE HOCKEY: What we've seen today is pure positive evidence that the banks are thumbing their nose at the government and their enjoying the fact that there is a lack of competition in the mortgage lending market.



STEPHEN LONG: A lack of competition also concerns the Australian Chamber of Commerce and Industry.



CBA increased its share of lending to small and medium enterprises over the past year in a period when overall loans declined.



But system-wide, the ACCI is concerned that bank profits are coming at the expense of smaller businesses.



ACCI's chief economist Greg Evans



GREG EVANS: It's desirable in the Australian context and certainly it's helped us weather the global financial crisis to have a well run and strong and profitable banking system. But it's also important that we have a highly competitive banking system and I think what we've seen over the past 18 months or so is that many foreign banks and non-bank lenders are less active in the market, are less active in the area of particularly lending to small and medium sized enterprises, so we've seen less competition in that part of the market which has had consequences.



STEPHEN LONG: Few dispute that consumers and small and mid size businesses in particular are paying more because a lack of competition.



Like other banks, the Commonwealth blames higher costs of funding post the GFC and Ralph Norris said he can't guarantee the bank won't continue to put rates up above and beyond the cash rate rises by the Reserve Bank.



RALPH NORRIS: I hope that the sun comes up tomorrow but I can't guarantee it and certainly I don't guarantee the future from the perspective that we've already seen significant volatility over the last three to six months. For me to be able to make unequivocal guarantees would be rather rash.



STEPHEN LONG: Before the global financial crisis there was growing competitive pressure on the major banks.



Non-bank lenders and smaller regional banks were able to source cheap funding from the global capital markets and undercut big bank margins.



But post-GFC, that's gone into reverse.



The major banks have grabbed more market share and, fearing bank failures, the competition watchdog okayed the swallowing up of smaller players by the big lenders.



The consumer association, Choice, has a suggestion that might have made Ben Chifley smile. Its spokesman, Christopher Zinn.



CHRISTOPHER ZINN: We hear a lot of talk politically about broadband but we think there's some benefit in a broadbank and that's a national low-fee bank, perhaps supported by the government that puts customers before shareholders.



STEPHEN LONG: Like the Commonwealth Bank of old, perhaps. Don't hold your breath.



MARK COLVIN: Stephen Long.