In comparing the 3 Major Financial Institutions, there are problems associated with the size effect. Ratio analysis are not bias to the size of the underlying equity, assets or liabilities, but comparative change relative to each of their figures as well as contrasting percentage change in growth or decline from previous years.
In comparing the institutions ability to generate profits for investors, the Return on Equity (ROE) is particularly strong for Commonwealth Bank of Australia (CBA), increasing from initial levels of 10.86% (2004) to 23.40% in 2006, the highest return to shareholders and interests, averaging 47.85% growth over the 3 years. This was achieved through outstanding performances in non interest income, in the 2005 period (where shareholders equity had remained relatively unchanged). St George Bank returns are relatively stable, whilst National Australia Bank (NAB) has experienced a decrease in profit of $4253m to $3087m, due to falling profits in dividend revenue and non interest income (loan fees).
In determining each institutional performance in non interest income (which most large banks have become increasingly reliant on), is through the efficiency ratio. Throughout 2004-2006, CBA and St George have decreased their efficiency ratios 14.1% and 6.4% respectively. This indicates a decrease in their overall expenses and increase to earnings, and both banks capable to channel their resources into earning non interest income to supplement their mainstream interest loans income. Notably, is NAB's movement in reducing interest expenses, has been mixed. The decrease in 2004-2005 of 19.2% has slightly been offset by a increase in the ratio of 8.6% in the 2005-2006 comparative change, due to the decrease in non interest income.
However, CBA's increase in returns, as well as a more significant portion of income contributed by non interest incomes, cannot be without its risks. Liquidity risk has...