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Australia’s big four have developed world-class efficiency thanks partly to focusing on mortgages and outsourcing, according to the Financial Stability Review.
The new Reserve Bank of Australia report revealed that the cost-to-income ratio of the big four has fallen from 63 per cent in the mid-1990s to 44 per cent in 2012/2013.
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That places Australia third in the world, behind Hong Kong and New Zealand, and helps explain the “strong profitability” of the big four.
The report said that one reason the majors have low cost-to-income ratios is that residential mortgage lending represents a high share of their total lending.
Housing loans are more homogenous than business loans, so the cost of distributing them has benefited more from technological advances, it said.
The report also noted the strong link between low personnel costs and low cost-to-income ratios.
“By adopting new technologies, banks have been able to provide more streamlined banking services to customers and improve back-office processes such as loan approvals, and information processing and management,” it said.
“Additionally, a focus on reducing high-cost, low-value operations resulted in the closure of a large number of branches during the 1990s.”
The majors have renewed their focus on costs in recent years to help offset the effect of more moderate balance sheet growth, according to the report.
Their measures have included retrenching staff, upgrading core banking systems, and sending back-office processing and support operations offshore.
“In addition, the major banks have moved towards branch operating models that focus on product sales and cross selling, as opposed to traditional transactional banking activities that are being done increasingly through internet and mobile facilities,” it said.
[Related: Think twice before increasing mortgage competition, says RBA]
