Here’s how CBA managed to make a huge $9.45bn profit

How did the CBA make a whopping big $9.45 billion profit? The quick answer is to say you start with a whopping big $9.15 billion profit the year before and grow it by just three per cent.

While that’s glib, it’s also close the heart of the matter of that outstanding profit: the CBA makes a very big profit because it’s a very big bank that manages to lend money for 2.07 percentage points more than it pays to borrow it and it’s managed to increase its share of the Australian market. It also helps to keep bad debts relatively low (though not as low as they were last year).

It’s easy for the bank’s many critics to claim the amount is obscene and focus on the fact that the amount is a record – but that is a little simplistic. On some measures, the CBA is actually a little less profitable now, even while posting a record profit.

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How? From the point of view of the owners of the bank – the shareholders – the percentage return on equity invested in the bank fell in the latest year from a very rich 18.2 per cent the previous year to 16.5 per cent this time. What’s more, that ROE fell to 15.6 per cent for the second half of the year because the regulators forced CBA shareholders to kick in another $5 billion in capital.

The return the bank makes on its “assets” (loans) fell from 1.1 per cent to 1 per cent.

For that matter, while profit was up three per cent over the year, it fell in the second half - $4.6 billion in the six months to June 30 compared with $4.8 billion in the 2015 June half.

What those figures mean is that the CBA hasn’t been gouging customers more. The net interest margin being trimmed 2 points to that 2.07 per cent means their level of “gouging” is almost steady. Our biggest bank is beginning to feel the winds of competition and increased regulation, but it’s still managed to grow its most valuable business – mortgages – by 7 per cent.

Basically, the CBA profit grew to a record because more of us were happy to do business with it – to lend it money and borrow from it.

Yes, the CBA is very profitable big bank – but it’s also a healthy thing for Australia to have very profitable big banks. It means they are capable of lending. It is not at all good for the economy to have weak banks. The regulators are in the process of making our big four banks become even stronger by holding more capital.

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The harshest critics of the Big Four seem to want their profits limited by government action. That sort of government action has been tried in various systems around the world over the decades and has generally been found to fail miserably.

Competition is the best way to ensure a bank’s profits aren’t out of proportion to its size. Requiring the Big Four to hold more capital has levelled the domestic playing field a little. The non-Big Four – the credit unions, smaller banks, building societies and alternative lenders – are more competitive now than they have been for, well, as long as I can remember.

There are two things to do if you don’t like the idea of the CBA making such a big profit: take your business elsewhere; and realise you probably are one of the shareholders benefitting from it through your superannuation fund. And if you do like the CBA making big profits, I suspect you probably own more CBA shares directly.

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and online journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.