Big 4 banks.
What do you think of when I say that?
Obviously they are the Commonwealth Bank, Westpac, NAB, and ANZ, but what is the actual
difference between the 4 apart from just better or worse interest rates?
Are you any better off as their customer, or their shareholder?
Which one makes the most money off you, and which one can you make the most money from?
In this video, we are going to take a look at each of these banks and find the important
differences that can make or break the bank.
The four big banks in Australia are actually among the most profitable banks in the world.
Together, they account for a huge 80% of the mortgage market share back in 2012, but now,
in 2021, that has reduced to just 60% with the smaller banks making a significant resurgence
and the rise of neo-banks also taking a share.
Now, here’s a really simplified way of describing how banks make money.
A person depositing their savings into a bank account receives a small percentage back from
the bank in return for entrusting them with it.
A large part of this deposit can now be lent out by the bank as a loan to someone who wants
to buy a house for example, and the bank profits by charging them more interest than it has
to pay to the person who deposited the money in the first place.
Of course, this is a very simplified version of how the bank’s business model works but
in reality there are plenty of complexities that come into play here.
For one, banks actually don't require deposits to make money off lending, nor do they require
lending to make money off deposits, but the two functions synergize very nicely with each
other to create what we would typically think of as a bank.
To increase profits, the bank would need to make sure it was attracting and retaining
more deposits in order to keep expanding lending.
So all of this is great, but how do banks differ from one another?
If this is the proven business model, how do they differentiate themselves?
Well, it's what they do with the margin that they make to create financial products that
separates them.
This is a huge myriad of offerings which includes the website where you can do online banking,
the design and usability of the phone apps, the payment terminal services or mortgage
packages, even the number of bricks and mortar branches which make it accessible for the
locals.
And this is just the retail sector which includes everyday people’s banking like you and me.
There’s also the business sector where banks would provide the same financial services
but to businesses looking to buy new assets, make large transactions and track and control
all business expenses, for a larger service fee.
Finally, the last business unit is the institutional lending which is financing even bigger companies
like large global corporations or even government entities to fund large public projects.
Also, all 4 big banks have a New Zealand division as well and even though it isn’t technically
a business division, because it's a country.
It does get treated as a separate business entity in terms of their operations.
Just like how Qantas actually owns Jetstar to compete for a different market, the big
banks also own smaller bank brands to win over customers who refuse to bank with the
big 4.
For CBA, they are the owners of Bankwest, and a whole host of other financial companies
including Aussie home loans.
For Westpac, they own St George Bank, Bank of Melbourne and Bank SA.
NAB owns the popular online only bank UBank, and ANZ doesn’t own any other business at
all.
Now, let’s compare the 4 big banks in 2020 and see how they stack up in terms of the
business entities that we mentioned earlier.
For the retail division, CBA leads the pack with 4 billion dollars in profit, followed
by Westpac with 2.77 billion, NAB comes in third with 1.4 billion and ANZ releases its
retail and business entity together as one figure so I’m just going to estimate it
at 1.3 billion.
For the business group, CBA again leads the way with 2.65 billion dollars closely followed
by NAB with 2.5 billion.
So you can see compared to its retail profits, NAB actually is more invested in funding businesses
than personal banking.
ANZ is estimated to have around 1 billion in business banking, and Westpac brings up
the rear at only 0.7 billion.
Which means Westpac is more geared towards personal banking with the help of subsidiaries
like St George bank.
F tional banking, ANZ leads the way with 1.8 billion dollars of profit making them more
focused on governments and large corporations than the others.
NAB follows closely behind at 1.5 billion, CBA comes in third at 0.65 billion, and Westpac
brings up the rear at 0.6 billion.
Finally, each of the banks also has a New Zealand division, for which ANZ and NAB are
tied at 1 billion dollars in profit each.
CBA comes in third at 0.8 billion, and Westpac last at 0.6 billion.
Now let’s sum all of this up and see how profitable each bank compared to their size.
And no surprises with CBA leading the way at 7.5 billion dollars in net profit and truly
deserving of Australia’s biggest company.
Westpac would have made 3.3 billion dollars profit but they got whacked with a 1.3 billion
dollar fine for breaching the anti-money laundering act, so they are down to 2 billion instead.
NAB brought in 2.6 billion dollars mostly from its business division, and ANZ is really
punching above its weight at 3.6 billion even though they are the smallest of the big 4
thanks to its strong institutional lending and New Zealand group.
There are plenty of advertising and promotional offers to entice new customers to the bank,
and those customers don’t really care about the future of the bank.
In fact, I’m sure most people secretly wish their bank would go out of business so their
loans can be forgiven.
So we’re going to take a look at the future of each bank from a shareholder’s perspective.
For CBA, they’ve invested in the Buy Now Pay Later service Klarna to take on Afterpay,
and also introduced a zero interest credit card as a 2 pronged attack on the giant Afterpay.
CBA also launched CommBank AdvancePay at the end of 2020 to let you spend your wages before
you get it, and partnered with Backr which provides tools to help people start new business.
All of these are aimed at Millenials which will really cement CBA’s positions as the
leading bank and investors can also look forward to stronger earnings growth over time.
Westpac on the other hand, has struggled in its mortgage share which has been falling
even before the pandemic happened.
Coupled with the Austrac penalty and a further 1.7 billion dollar investment to fix compliance,
2020 will be a year that they would like to forget.
There has been some good partnerships made by Westpac to stay relevant though, including
one with SocietyOne and another with Afterpay.
But this is only a small step to get its earnings back on track again, which was definitely
helped by its investment into Coinbase netting it more than half a billion dollars.
NAB has had a better run with the acquisition of the neo-bank 86400 to help accelerate the
growth of Ubank.
NAB also the first to launch a zero interest credit card as its way of combating the rise
of the BNPL trend.
Its strategic partnership with Microsoft to migrate applications to the cloud will help
to streamline the business and reduce future expenses which will boost earnings and keep
the dividends for shareholders flowing.
Finally, ANZ has pretty much refused to enter the BNPL space, believing that it is not a
sustainable industry and instead decided to focus on its own customer loyalty and reward
programs such as its investment into the ASX listed CashRewards.
It has also partnered with the European payments company Worldline to help improve its lead
in business and institutional markets and so is looking to improve more traditional
banking divisions rather than chase new ones.
A move that is definitely a lot safer than trying to innovate a new industry.
So from all of this so far, the banks are indeed very much similar in their business
model, but very different in their strengths, and they have very different visions for the
future as well.
As a bank customer, you’d probably won’t notice that big of a change between banks,
but to a shareholder, the earnings, the strength of each division, and the future direction
matters greatly because it affects the share price of each bank, as well as the stability
of the dividends that gets paid out.
In fact, if you can afford to, I strongly suggest to transition away from a bank customer
and into a bank shareholder.
You’ll get a return of around 5% in dividends alone compared to just 1 or 2% in savings
rate nowadays.
Pick a bank that you believe in with a focus in the right direction.
If you think the BNPL space will take off, CBA is a good bet.
If you are anticipating strong business recovery, NAB is in a good position.
If you want a bank that’ll bankroll institutions, ANZ is the right pick.
And if you are after a value stock in banking, Westpac is slightly undervalued right now.
With the right attitude and some knowledge of the banking sector, a shareholder will
almost always come out on top over a savings account with any of the 4 big banks.
Thanks for watching the third of my series comparing similar companies on the ASX.
If you want to see a specific comparison between a group of companies, let me know in the comments
below.
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Thanks for watching and as always I’ll see you in the next video.