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COMPARISON OF EFFICIENCY OF AUSTRALIAN FINANCIAL SECTOR AND HIGH INCOME COUNTRIES

David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group www.rockstarconsultinggroup.com

FINANCIAL SECTOR EFFICIENCY

This report summarizes comparison of Australian Financial Sector Efficiency against High Income Countries over last 11 years. Efficiency considered here is institutional efficiency and not market. Data source is World Bank Financial Development Data Bank. All definitions are also taken from data source.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK LENDING-DEPOSIT SPREAD

Difference between lending rate and deposit rate. Lending rate is the rate charged by banks on loans to the private sector Deposit interest rate is the rate offered by commercial banks on three-month deposits.

Since 2007 Australia spread is lower than high income countries.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK LENDING-DEPOSIT SPREAD
6

5

4

3

Australia Bank lending-deposit spread
High income Bank lending-deposit spread

2

1

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK NET INTEREST MARGIN (%)

Accounting value of bank's net interest revenue as a share of its average interest-bearing (total earning) assets. Note that banks used in the calculation might differ between indicators. Australian Net Interest Margin is lower but close to High Income Countries.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK NET INTEREST MARGIN (%)
5 4.5 4

3.5
3 2.5 2 1.5 1 Australia Bank net interest margin (%)

High income Bank net interest margin (%)

0.5 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK NONINTEREST INCOME TO TOTAL INCOME (%)

Bank’s income that has been generated by noninterest related activities as a percentage of total income Noninterest related income includes net gains on trading and derivatives, net gains on other securities, net fees and commissions and other operating income. Australian Bank’s non interest income share has been falling and remained below High Income Countries.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK NONINTEREST INCOME TO TOTAL INCOME (%)
60

50

40

30

Australia Bank noninterest income to total income (%)

High income Bank noninterest income to total income (%)
20

10

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK OVERHEAD COSTS TO TOTAL ASSETS (%)

Operating expenses of a bank as a share of the value of all assets held.

Total assets include total earning assets, cash and due from banks, foreclosed real estate, fixed assets, goodwill, other intangibles, current tax assets, deferred tax assets, discontinued operations and other assets.
Australian Bank’s overhead costs have remained generally lower than High Income Countries.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK OVERHEAD COSTS TO TOTAL ASSETS (%)
3

2.5

2

1.5

Australia Bank overhead costs to total assets (%)

High income Bank overhead costs to total assets (%)
1

0.5

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK RETURN ON ASSETS (%, AFTER TAX)

Commercial banks’ after-tax net income to yearly averaged total assets.

Australian Banks have enjoyed relatively higher returns than High Income Countries. (Kindly See Boone Indicator for better interpretation)
(Similar behavior of return on equity, therefore graph is not presented)

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

BANK RETURN ON ASSETS (%, AFTER TAX)
2.5 2

1.5

1

Australia Bank return on assets (%, after tax)

0.5

High income Bank return on assets (%, after tax)

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-0.5

-1

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

THE BOONE INDICATOR

A measure of degree of competition. Calculated as the percentage change of profits due to 1 percent change in costs. Based on rationale that higher profits are achieved by more-efficient banks.

As competition increases all banks become more competent and therefore allocation of industry resources is efficient.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

THE BOONE INDICATOR

As allocation of industry resources is more efficient due to competition an increase in cost would not increase profit. The more negative the Boone indicator, the higher the degree of competition.

An increase in the Boone indicator implies a deterioration of the competitive conduct of financial intermediaries.
Australia has a positive Boone since 2005.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

THE BOONE INDICATOR
0.4 0.3

0.2

0.1 Australia Boone indicator

High income Boone indicator 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-0.1

-0.2

-0.3

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

CONCLUSION

Australia has been generally lagging behind other High Income Countries in Financial Sector Institutional efficiency. There is enough room for further efficiency gains in Australian Banking Industry.

The higher profit and lower costs hint that. Boone Indicator also confirms it.
Therefore, more reforms to improve efficient allocation of resources is proposed.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)

DATA SOURCE AND REFERENCE

Data Source:

data.worldbank.org/data-catalog/global-financialdevelopment

All definitions are taken from the data source.

Comparison of Efficiency of Australian Financial Sector and High Income Countries. David Solomon Hadi - Chief Strategist Financial Services Rock Star Consulting Group (www.rockstarconsultinggroup.com)