Australian Banking Industry in-depth Analysis

This report provides an in-depth analysis of the banking industry in Australia, including its contribution to the GDP, relationship with the government, and impact of currency value and imports from China. It also discusses the regulatory framework and the major banks in the industry.

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Australian Banking Industry in-depth Analysis

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Executive Summary
The following report is on in depth analysis of the banking industry of Australia. The report
contains details of the banking industry and the companies (Public and Private) and their
contribution to the industry and how much does it contributes to the GDP. The exchange rate of
the currency and how its deviation does affects the economy. Imports from China and its affects
as well as, the rate of unemployment in the economy and how it affects the economy is discussed
below. Moreover, the Government of Australia and their part of regulatory framework is also
discussed. The contribution of the banking industry in the economy is also given to analyse
growth of GDP and comparison between the companies. The insights and analysis after the
assessments is outlined briefly and the learning and recommendation is given based on the
findings.

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Table of Contents
A. Estimation of banking industry’s contribution in Annual GDP. What proportion of GDP
does this represent? Explanation of the data Models.......................................................................4
B. Industry’s relationship with Government of Australia.........................................................6
C. Brief explanation..................................................................................................................8
 Impact of value of Australian dollar(AUD) decreases by 10% against other key currencies
8
 Impact of China reduces imports by 10%.............................................................................9
 Impact of Australia’s rate of unemployment increases to 10%..........................................11
D. Outcome all of these changes happen within one year?.....................................................12
E. Conclusion..............................................................................................................................13
References......................................................................................................................................17

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A. Estimation of banking industry’s contribution in Annual GDP. What proportion of
GDP does this represent? Explanation of the data Models
The banking system in Australia contributes to the growth of the Australian economy and
acts as important contributor of the annual growth of Australian GDP. GDP defines the
growth of an economy with respect to the monetary value of the products and services
produced by the economy. Creating jobs, injecting billions of dollars, and paying dividends,
interests and taxes are the some of the steps in contributing to the Australian economy. With
around 450,000 people, approximately 16.7 billion in paid taxes, 6 billion in dividends and
interest payments, the banks acquires more than 75% of the all banking operations in
Australia (Rba.gov.au, 2019). The big four banks (Westpac, National Australian Bank,
Australia and New Zealand Banking Group and Commonwealth bank) in Australia pays 45%
of the corporate tax in Australia. As one of the growing economy in the world the Australian
people enjoy a good standard of living. In 2017-18 the businesses with the biggest offer of
current value net esteem included (at basic prices) were Financial and Insurance Services
(9.5%), Mining (8.8%) and Construction (8.1%) (Rba.gov.au, 2019).
The GDP annual growth rate of Australia is 2.30% as of 4th quarter of 2018 calculation.

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The Gross Domestic Product Annual change from 2005 – 2018 is shown in the chart and the
annual change in the value of GDP 1814778 million AUD (Rba.gov.au, 2019). The banking and
the insurance sector of Australia contributed $196.98 billion AUD to GDP in the last year
according to Treasury department of Government of Australia.
Country Subject Descriptor Units Scale 2017 2018 Estimates
Start
After
Australia Gross domestic product, current
prices
U.S. dollars Billions 1,379.55 1,500.2
6
2017
Australia Gross domestic product, current
prices
Purchasing
power
parity;
international
dollars
Billions 1,246.48 1,312.5
3
2017
Source : Abs.gov.au, 2019
GDP trend and quarterly change
percentage
GDP Annual Change measure

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Therefore from the above approximated value of the GDP in 2018, the contribution of banking
and financial services is
1379.55 billion /140,000 million AUD = 9.45%
The 9.45% contributed by the banking sector and their services in the year of 2017-2018.
Source : Abs.gov.au, 2019
The above data model shows the shares of services industry in the Australian GDP which is
between 64.41% - 66.97% from 2007 to 2017 (Abs.gov.au, 2019). The whooping 12.96% is the
contribution of the banking sector among the 66.97% of the GDP (Rba.gov.au, 2019). Thus it
can be concluded that Banking is the major sector in the Australia for the growth of the
economy. During the last two years the National Net borrowing of the economy was 54.2 billion
which reflects the FDI flow in the economy (Abs.gov.au, 2019).
B. Industry’s relationship with Government of Australia
The legal framework of the banks is regulated by the Banking Act 1959. The Reserve Bank Act
1959, Financial Sector Act 1998 are some of the major constitution of the legal framework of the
banking institution of Australia. The above mentioned acts are the foundation of the regulatory
framework, business conduct guidelines and practice frameworks. Banks also plays a major role

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in Australia’s financial system. Some of the activities are insurance, fund management, stock
broking, business banking, and acts as an ultimate lender (Blount, Castleman and Swatman
2005). The banks act as the financial intermediary as well as the major enforcer of the strict
regulations regarding finance of the country. Among the 53 banks in Australia 14 companies are
predominantly owned by Australia. These domestic banks also occupy the 75% of the financial
services market in the economy (future of banking in australia., 2019). Foreign bank branches
and subsidiaries have also acquired significant part of the banking industry in the economy. The
Australian economy has a number of Authorised Deposit Taking Institutions listed above in the
tables. The three essential regulatory and management body of the Continent are Australian
Prudential Regulation Authority (APRA) established in 1998 (Maddock and McLean 2000). This
body is in the management of all the Deposit Taking Institution known as ADIs and for their
supervision. Australian Securities and Investments Commission (ASIC) established for the
corporate and financial markets. The Reserve Bank of Australia is the body to ensure financial
system stability as well as the payments system of the economy. Moreover, it also makes the
monetary policies. As one of the enforcer of prudential standards and practises APRA framework
follows the credit risk, capital adequacy, Outsourcing, Business Continuity management, Audit
and reporting, Prudential standard. These are properly reviewed and applied all over the country.
ASIC administers financial reporting, corporate fundraising, outward insolvency (Joshi, Cahill
and Sidhu 2010). Reviewing the security and budgetary framework and money related
arrangements, advancing the wellbeing and effectiveness of the installed framework, dealing
with the issuance of banknotes, giving financial administrations to the Government and its
organizations and abroad national banks are done by RBA (Oster and Antioch 1995). It also
deals with Australia's authentic resources and gives a liquidity facility to ADIs (Authorised

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Depository Institutions) (Reserve Bank of Australia, 2019). Thus it can be concluded the
monetary policies in a whole are particularly influenced by the government in Australia. The
four of the mega banks hold around 1.4 trillion dollar of total assets, which is equivalent to 140%
of GDP contribution in the country (Abs.gov.au, 2019). The banking sector included four major
banks which are Commonwealth Banks of Australia, Australia and New Zealand Banking group
Limited, National Australian Bank and Westpac Banking Corporation. The Government’s four
pillar and they have policy restrictions which prevents the four banks from mergers between
them. The corporate governance among the companies is also subjected to regulations of
Australian Exchange Board rules (Harris 2013). The supervisory regime, corporate governance,
licensing acts is there more to prevent the banks from deviating from the regulatory framework.
Australia or the Authority, Australian Prudential Regulation Authority (APRA) and the Reserve
Bank of Australia (RBA)) is a member of the Basel Committee on Banking Supervision (BCBS)
and APRA is vigorously involved in the effort of the BCBS provisions (Reserve Bank of
Australia, 2019).
C. Brief explanation
 Impact of value of Australian dollar(AUD) decreases by 10% against other key
currencies
Key
Currencies
exchange rate
with respect
to 1 AUD
Exchange rate after
decrease in AUD by
10%=Present
exchange

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rate(1+10/100)
U S Dollar 0.71 0.781
Euro 0.63 0.693
Japanese Yen 79.03 86.933
British Pound 0.54 0.594
Canadian
Dollar
0.95 1.045
Source : Author
Therefore from the above table it can be seen that when the value of the Australian dollar
decreases by 10% in the value, it may affect the economy ghastly as the value of other currencies
will increase and the exchange rate will also increase. As the exchange rate affects the financial
flow in Australia and rest of the world and flow of trades, the decrease in value affects directly to
the price of goods and services. Indirectly the reduction in value will affect the economy in
inflation rate, consumption and in factors of production. The depreciation will influence demand
of tradable and non-tradable goods. There is also an advantage of the depreciation of the
currency value in Australia as it will result increase in export and then decrease in import. It will
increase demand of non-tradable goods. In turn the demand will increase in Australian people
and to meet the demand, they will have to increase the production of the goods and services.
Thus it will affect the employment rate positively, increasing the rate.

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 Impact of China reduces imports by 10%
China is one of the major import export destination of Australia contributing up to 24% in
imports and 35% of the exports goes to China in a year according the statistics of 2017-2018
Department of Foreign affairs and Trade (Ausbanking.org.au, 2019).
The top 10 trading partners of Australia is given below in the charts.
Germany
Thailand
United Kingdom
Singapore
New Zealand
India
Rep of Korea
United States
Japan
China
0 50 100 150 200 250
$20.9b
$21.8b
$27.6b
$24.7b
$26.4b
$25.7b
$38.6b
$66.6b
$68.5b
$174.2b
$22.4b
$24.7b
$27.8b
$27.8b
$28.3b
$29.1b
$52.3b
$70.2b
$77.6b
$194.6b
2017-18 2016-17
Source : Abs.gov.au, 2019
The above chart ranks China as the major trading partner in Australia.
as at ABS BOP Dec Qtr
2018
2012
-13
2013-
14
2014
-15
2015
-16
2016-
17
2017
-18
2017
-18
shar
e
2017-
18
grow
th
5
year
tren
d
$b $b $b $b $b $b % % %
1 China 46.5 52.6 59.5 64.2 64.2 71.3 18.0 11.1 8.4
2 United States 41.6 42.6 45.5 48.8 45.9 48.8 12.3 6.2 3.2
3 Republic of Korea 10.2 12.7 15.1 14.2 15.9 28.7 7.2 80.9 17.9

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4 Japan 20.8 21.3 21.3 22.6 24.1 26.3 6.6 9.2 4.6
5 Germany 13.2 14.9 14.9 16.3 16.6 18.2 4.6 9.8 5.9
6 Thailand 14.1 13.6 14.4 16.8 16.7 18.1 4.6 8.5 5.9
7 United Kingdom 13.0 13.5 13.9 15.7 14.8 16.0 4.1 8.1 4.2
8 Singapore 18.9 18.2 15.9 13.2 13.3 14.6 3.7 9.8 -6.6
9 New Zealand 10.6 11.7 11.9 12.3 12.7 13.9 3.5 9.2 4.8
1
0
Malaysia 10.3 12.8 11.7 10.8 11.4 12.6 3.2 10.6 1.6
Total 326.5 343.2 349.4 357.5 362.9 395.8 100.
0
9.1 3.3
Source : (Abs.gov.au, 2019)
From the above table it can be seen that the top 10 import sources of Australia has China among
the major importer contributing 71.3 billion dollar in Australia with 18% share in Import with
average 8.4% average trend.
If China reduces imports by 10% it will directly affect the balance of payments of
Australia against China. The goods and services which surmount the balance of payments
between China and Australia should be zero. Thus if the imports reduces by 10% the export
should also be reduced by 10% to make the balance. Otherwise the capital reserve that Australia
has in their current and capital international accounts will run dry to maintain the balance. Thus
the reserve will face a deficit. The export and import affects the GDP of a country. Thus to
overcome the deficit Australian economy must replace the goods and services need of the
country which was being filled by China through other sources.

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 Impact of Australia’s rate of unemployment increases to 10%
From the above chart it can be seen that the unemployment rate of Australia is 4.6%. Thus, if the
unemployment rate of Australia increases by 10% more the standard of living will decrease,
saving ratio of the individual will decrease, consumption of the individual will decrease. On a
society level there will be inefficient use of resources, lesser tax revenue for government, loss in
human capital, lower GDP and political instability among the economy (Rba.gov.au, 2019).
D. Outcome all of these changes happen within one year?
If all the above mention changes happen at once or within a year, there will be a lot more
instability in the economy. The banks play a primary role in lending and depositing operations in
the country, with acquiring 9.5% of the GDP contribution. Therefore reduction in GDP per
capita from the affect in reduction in export and increase in unemployment rate will negatively
affect the economy. Savings rate will decrease, which will affect the banks performance. The
Undercapitalisation will affect the Major Banks in Australia and eventually affect its
performance (Aye 2012). The regulations forwarded by The Australian Prudential Regulation

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Authority have issued new rules in increasing the capital reserve of the banks, which will also be
difficult to achieve after the reductions in export and decrease in GDP. The market capitalisation
rate will decrease and as the consumption decrease, it will affect the production and growth of
the economy. Though there are some advantages of reduction of China’s import decrease and
exchange rate changes as this will ensure the deficit in import is either compensated by domestic
production increase or building superior relationship with other countries (future of banking in
australia., 2019). The decrease in the value of Australian dollar will affect the capital reserve
negatively and the Balance of payments will be unstable. Borrowed finances from the foreign
countries will be affecting the banks to increase their services expenses. The inflation rate and
interest rate of the country also gets affected by the instability in GDP. The income of the
economy has ripple effect in the banking sector (Staffas, Gustavsso and McCormick 2013). The
credit growth of the economy of the Australia will be affected and will hit the banking industry
after the currency devaluation of AUD. Borrowed funds of the companies ensures the
profitability of the banks which is also affected by the currency exchange rate, as the strong
currencies around the world tends to dominate the weaker currency world. Another major part
that affects the banking industry is the government regulation. Federal Government of Australia
is democratic in nature which affects the policies of the government in different industry.
E. Conclusion
From the above exercise It can be concluded that an economic and a financial situation are very
much interdependent. Through world trade all the individual economies of the world are related
(Harris, 2013). Thus if one produces a shock the ripple effect does harms all the other (Kot and
Hendel, 2012). In spite of the fact, that the sharp drop in the estimation of assets has debilitated
numerous banks' asset reports, the debilitating of financial movement has been hindering the

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nature of bank advances, unfavourably influencing their capital positions and their eagerness to
stretch out credit to the private area (Holton 2013). This is the effect of the relation between the
regulation of banking industry and the unfavourable situation created by federal government with
respect to banking industry. The banking industry is interwoven in all level and affects all the
other industry. The macroeconomic factors listed above are affected by the policies of the
government bodies. The policy builds the framework or the base of the financial situation of the
whole economy. The trade between ensures countries ensures the capital flow and ultimate
growth. Foreign Direct Investment contributes to this reason
(Linking_Banks_and_Strong_Economic_Growth, 2019). Government support the financial
institutions in terms of recapitalisation, providing guarantees on bank debt, asset relief schemes.
These have been significant and the pertinent in measuring progressiveness and their
implementation (Kent & Debelle, 1999). The immediate need of macroeconomic strategies and
bank reinforce plans to advance the economy's recuperation and protect cost and money related
solidness (Lavergne 2014). However, a principal approach target ought to be that the
improvement of movement and the fix of the budgetary framework must be accomplished in a
way that will guarantee a supported development act and will keep the repeat of scenes of money
related uneven characters and market over abundances that can compromise again monetary
strength and economic welfare (Safeena, Date, and Kammani 2011). Unemployment rate
increases in the economy and affects all the industry. A strong supervisory financial system is the
key to prevent all the adverse effects of economic shocks. Failure to address all the
transformations in financial system can affect the industry. Government support to the financial
system growth and reform is main criteria to prevent any financial or economic shock. As the
major contributor to the economy Australian Banking industry is much mature to control the

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adverse effects to the whole sector. The Four major publicly listed banks contribute more than
70% in the share of bank’s contribution to the GDP (Thangavelu and Jiunn 2004). Moreover,
strong performance is seen in increase in employment growth rate. The country’s labour market
is constantly adding various jobs than is desirable to accommodate the development of the
minimum working age population. This has caused in stable declines in the unemployment rate
over the years, while the observation shows that participation rate has also appreciated to the
highest seen on record. Job advances also have been broad based across greatest sectors, but also
robust in household and financial services sectors (Hosseinzade 2016). Other sectors are also in
the boom and will continue to do that according the prediction and insights of the advisories
(Salehi and Alipour 2010). The average earnings per hour have increased and it will grow from
the employment rate increment.
Though an individual company cannot make certain changes which will improve the
vulnerabilities of key economic factors, managing the risk on an industry basis can make huge
difference. To overcome the situations the following changes can be fruitful according to me.
 To overcome the unemployment rate increase the companies can ask their employees
for pay cut rather than retrenching by firing a portion of the employees. Thus the
employees may remain in the concentration of employment rate and not affecting the
economy negatively by their unemployment.
 Expanding the Australian company’s operation overseas and offering services,
outsourcing to countries by offering unique services to them can also increase the
balance of payment instability.
 In case of economic shocks like GDP per capita reduction which effects the
individuals a social campaign to schools and poor families to maintain their children’s

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enrolments in schools and their proper nutrition to be maintained. Thus it will ensure
the future of the economy is stable.
 As the inflation rate appreciation, interest rate increase, and currency value
depreciation affects the economy directly. To reduce the risk of the effects of the
monetary policies one must be prepared and strategies risk management capabilities
of the company to reduce these economic shock.
 Corresponding to the economic shocks listed above the credit growth of banking
industry may also decrease. Thus tighter credit facilities harm companies by reducing
the financing of overseas project. This affects in depreciation of projects and
divestments. Therefore, in this scenario the company may seek government help in
acquiring different projects as the Reserve Bank of Australia can lend money to the
banks in times of crisis.

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