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Strategic Analysis of Banking Industry

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Section Two


  1. Introduction

Australian banking is sophisticated and profitable; however, it currently stands at a crossroads.

The “big four” banks (including NAB) and many of their smaller mutual banking and building society counterparts continue to enjoy healthy margins, but the status quo is under attack on three fronts.

Firstly, there is present threat of substantial regulatory reform within the next 12-18 months. Poor business practices and customer service have eroded the major banks’ social licence to operate, sparking a Royal Commission and a range of Government and regulatory enquiries, including a recent Productivity Commission report. These are likely to culminate in significant regulatory change which will dilute the power of established players by increasing competition and lowering barriers to entry. In the interim, it creates uncertainty that affects the ability of businesses to plan and potentially affects the availability of capital.

Secondly, having explored offshore initiatives with mixed success, the big four are now refocusing on their dominant share of the domestic market to seek opportunities for innovation driven efficiencies.

Finally, existing businesses are under threat from disruptive, non-traditional competitors entering the sector offering discrete services such as cryptocurrency, alternative payment systems and peer-to-peer lending. These business models are very different to established players who have consolidated their market share by offering a total range of financial goods and services.


This is a snapshot. It’s important to note that this is taking a consolidated view of the sector, and outcomes may be different when we look at different sub sectors.



2. Barriers to Entry

Current threat: Low; Future threat: Increasing

Barriers to entry in the banking sector are high due to stringent prudential and licensing regulations, high initial investment and the need for a social licence to operate including high levels of customer trust and bank’s hold customers’ money and data.

This last factor is a significant barrier for new entrants because of its intrinsic nature. Some customers will pay a small premium for the size and established reputation of a major bank; while others will forgo the breadth of products and services offered by a big bank for a smaller mutual bank that positions itself as operating in the interest of its members.

It is very challenging for a new bank to enter the industry offering both full range of services and the trust worthiness of an established major bank. Many new entrants wind up partnering with established constitutions to tap into their reputation and networks, or are ultimately acquired by a bigger player.  

The banking industry has undergone a consolidation in which major banks seek to serve all of their customers’ financial needs under their roof. This consolidation increases consumer trust as a barrier to entry for new banks looking to compete with major banks, as consumers are more likely to allow one bank to hold all their accounts and service their financial needs.


As can be seen on the graph below, banks have enjoyed considerable growth from 2004 to 2016, however, this is mainly due to M&A rather than organic growth.

Relative size of Australian banking groups (by total resident assets)

[pic 1]Source:

Regulatory Reform

The Government’s stated intent of regulatory change is to increase competition by make it easier for new entrants. To increase consumer choice and competition in banking, the Government will introduce an Open Banking regime in Australia, which will give customers greater access to, and control over their banking data.

This will complement reforms the Government is pursuing to facilitate innovation in the financial system, such as enhancements to the regulatory sandbox for financial technology start-ups and a legislative framework to allow crowd-sourced equity funding for proprietary companies.

To promote a more systematic approach to monitoring and identifying opportunities to improve competition, the Government has tasked the Productivity Commission to commence a review, on 1 July 2017, of the state of competition in the financial system to report in July 2018.


The Royal Commission into Banking commences in February 2018 and will hand down its findings a year later. New entrants reliant on these changes for market entry will not be able to initiate market activity until the recommendations of these reviews are implemented, unlikely before 2019.

In the meantime, this will likely create uncertainty that will dampen investor appetite and add additional complexity to both day to day and strategic planning activities.


3. Power of Suppliers

Current threat: Low; Future: Low

Australian banks’ main source of funding are:

  • Customer deposits (approximately 60%)
  • Wholesale funding
  • Short-term debt 20%
  • Long-term debt  10%
  • Securitisation and equity – 10%

Since the GFC, Australian banks have seen as 50% increase in the importance of domestic deposits over short-term debt as a funding source. While the banks now source most of their funding via deposits from households and corporations, they are reliant on the capital markets to plug the so-called funding gap. Less favourable conditions in capital markets typically increase the need for the major banks to chase deposits by offering attractive rates to savers.

The growing split between domestic deposits and short term/long term debt is due to increasing funding costs towards wholesale investments.

Domestic deposits


  • Supplier concentration is low - Many individual depositors, can’t influence market prices - LOW
  • Switching costs for an individual low between banks BUT high to get out of industry - LOW
  • Competition between banks is high in order to secure depositors
  • Deposits represent approx. 60% of funding. One of the reasons is banks were driving the deposit up due to high wholesale funding costs

Individual depositors, other than major corporate or High Net Worth Individuals (HNWI) depositors, have relatively little bargaining power as they cannot influence pricing. While Individuals can switch relatively easy from one bank to another, as a market there are very limited alternatives to depositing (where else do you go?).

After the global financial crisis, deposits become a popular source of funding for all banks. This has created a competitive price pressure among the banks even more pressure on the smaller players while the majors get more involved in this market Deloitte, 2012). The depositors have power to choose to deposit at the banks that offer high deposit rate. In order to capture the depositors major banks offered high deposit rate than the past, as a result of that, deposit rate become increasing. An increasing in cost of funding leads to a decrease in net interest margin that impose threat to all commercial banks. As Deloitte (2010) confirmed, “the net interest margins of regional banks have decreased by between 20-45 basis points mid 20017’.



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