National Australia Bank did well on a number of productivity measures during the 2007 reporting season for banks -– making a strong improvement in its cost to income, keeping expenses down and holding the line on margins. But it is still lagging on a number of growth and profitability measures.

Commonwealth Bank did the best job in achieving the balance in increasing earnings, providing a good return to shareholders and growing in important areas such as mortgages, while avoiding problems with deteriorating credit quality.

Return on equity. The average return on equity for the big five banks rose from 20.6 to 21.2 per cent. The leader was Westpac. Its ROE increased from 23.1 to 23.8 per cent. St George’s ROE increased from 22.9 to 23.2 per cent. Commonwealth Bank was up from 21.3 to 22.1 per cent.

ANZ’s ROE was the only one of the five to fall, from 20.1 to 19.6 per cent. NAB was the laggard, as it has been for the past three years, with an ROE of 17.1 per cent. But the bank reported the biggest increase, up 120 basis points from 15.9 per cent in 2006.

Return on assets was less impressive. St George’s ROA fell from 1.05 to 1.04 per cent. ANZ’s moved up slightly from 1.14 to 1.15 per cent.

Cash earnings. Commonwealth was up 18 per cent to $4.6 billion, Westpac up 14 per cent to $3.5 billion, St George up 13.1 per cent to $1.2 billion, NAB up 12.6 per cent to $4.4 billion and ANZ up 9.4 per cent to $3.9 billion.

Earnings per share. Commonwealth Bank’s earnings per share increased 16 per cent. Close behind was NAB, with an increase of 15.9 per cent. Westpac’s EPS growth was 13 per cent and St George’s was 11.8 per cent. ANZ produced a disappointing result, with EPS up only 8.1 per cent.

Cost to income. Again, NAB made the biggest gain, cutting its cost to income ratio from 54.5 to 50.8 per cent. But it remains at the back of the pack. St George led the way with a ratio of 42.5 per cent, down from 44 per cent. ANZ’s cost to income was 44.8 per cent, Westpac’s was 45 per cent and CBA’s was 45.8 per cent.

Operating expenses. With the big investment in branch expansion and extra front line staff, bank expenses have been rising. ANZ attracted criticism for allowing operating expenses to increase by eight per cent. St George and Commonwealth were up by seven per cent and Westpac by six. NAB has been keen to persuade investors that it is no longer a high-cost outfit. Its operating expenses rose by only 0.9 per cent.

Net interest margin. NAB did the best job of containing the steady erosion of margins. The interest margin in its Australian banking business was flat at 2.41 per cent and the group margin fell only five basis points to 2.29 per cent. Westpac was down 10 basis points to 2.19 per cent, St George was also down 10 basis points to 2.01 per cent and ANZ was down 12 basis points to 2.19 per cent. Commonwealth Bank suffered the biggest fall in net interest margin, down 15 basis points to 2.19 per cent.

Home loan growth. Several of the big banks failed to keep pace with growth in this important products area. NAB managed home growth of only 8.6 per cent in its Australian retail business. St George was up by 10.4 per cent and Commonwealth, with a home loan book of $196.3 billion, was up by 11 per cent. Westpac and ANZ managed 12 per cent growth in their home loan books.

Loan impairment. A combination of higher delinquencies, strong growth in assets and provisioning for uncertainty led to big increases in loan impairment expenses. ANZ’s impairment expenses were up 39 per cent, resulting in a $567 million hit to the bottom line, up from $407 million in 2006. NAB’s impairment expenses were up 36 per cent to $790 million, Westpac’s were up 29 per cent to $482 million, and St George’s were up 23.6 per cent to $178 million. The only bank that avoided a sharp increase in impairment expenses was Commonwealth Bank, which was up nine per cent to $434 million.

Asset quality. The banks concede that asset quality is deteriorating but argue that the change is coming off a low base and asset quality remains sound. Commonwealth Bank’s loan impairment to gross loans and acceptances actually fell from 0.14 to 0.13 per cent. St George’s bad and doubtful debts as a percentage of average assets rose from 0.14 to 0.16 per cent. Westpac’s impairment charges to average loans rose from 0.17 to 0.19 per cent.

Deposits. With the cost of wholesale funds rising banks that can fund more of their lending with bank deposits will have an advantage. Commonwealth increased savings deposits by 17 per cent to $49.9 billion and transaction account deposits by 17 per cent to $41.9 billion. ANZ increased customer deposits in the personal division by 13 per cent and deposits overall by 15 per cent. Westpac increased deposits in consumer financial services by 11 per cent, in business financial services by 15 per cent and in its institutional bank by 19 per cent. NAB increased deposits in Australian retail banking by nine percent, and in nabCapital by 30 per cent for an overall increase of 15 per cent. St George’s retail deposits were up by 10.9 per cent.

Wealth management. It was a big year for wealth management businesses. Changes to tax and superannuation rules directed huge volumes of savings into super funds. Commonwealth Bank’s wealth management division, Colonial First State, increased funds by 17 per cent to $177 billion. But the result was not as impressive as it appears at first sight. Most of the increase came from investment returns; the net funds inflow was only $1.7 billion. The best performer on this score was Westpac’s wealth management division, BT, whose net funds flow was $7.1 billion. NAB had net funds inflow of $6.4 billion and ANZ had a net flow of $3.3 billion.