growth business required - buy a bank, page-48

So the banking sector makes high NPAT.... sounds a lot, but then again there is a lot of money in banks....

Banking statistics are here:

http://www.apra.gov.au/adi/Documents/BANK%20Quarterly%20 Mar%2011)%20-%20PDF.pdf

The banking sector has assets of $3.196 trillion. See Key statistics.

Notably the key statistics show that the big 4 banks hold balance sheets of around $2.5 trillion and achieved 18.1% Return on Equity (from a 1.1% return on assets).

Any Telstra bank will not opertate at the scale of a big 4 bank. A Telstra bank will be hit in 3 places: APRA will require a higher level amount of Tier 1 capital; Telstra will not make the same net interest income to asset margin; and Telstra bank will lack the scale needed to generate the same income to cost ratio of a big 4.

You could say Telstra bank will be hit worse than the other Australian domestic banks for whom the key statistics show a Return on Equity of 7%. [Telstra is beating this now]. So while the numbers $30bn annualised NPAT are indeed large, the equity returns just are not there unless you are a big 4 bank with a balance sheet in the order of half to one trillion.

All the while for every $1 in mortgages you write or credit lines you provide you need to raise 7c to 10c of equity. [And then you will additionally need a large amount of Tier 2 capital - basically subordinated debt].

This capital will be diverted from other areas of Telstra's business. To build a $500bn balance sheet, and be able to take on the big 4, Telstra will need $35bn (assuming Telstra gets a gift of a 7% Tier 1 ratio from APRA) to $50bn (again 10% T1 is cheapish if it is starting from scratch) in equity from somewhere. And then it will need another $50bn or so in Tier 2 capital (which in Telstra's case will need to be subordinated debt) - i.e. saying that we can see Telstra taking on a big 4 is like saying Telstra should raise $70bn to $100bn cash.

Of course it could aim for a smaller scale, in which case it gets the triple whammy of higher capitalisation requirements, lower income to cost ratios and lower net interest margins.

A further practical question is how is the banking sector going to grow its aggreagted balance sheet by another half trillion or so to make room for Telstra Bank? APRA will not allow Telstra Bank to aggressively expand; nor will APRA allow the big 4 to aggressively compete with a Telstra bank- the moment APRA sees anything other than the strictest adherence to Marquis of Queensbury rules in bank competition it will hit all banks with additional capitalisation requirements in order to offset the riskiness that has been created in the banking system from the increased competition.

Bottom line is there are very clear and well understood reasons why no Australian Telco will ever become a full service "we manufacture credit" bank. Sure there are lots of interesting places Telstra can participate within payments, and financial services more generally but being a licensed ADI manufacturing credit is not one of them.