With a $351 billion secured mortgage book shared across 1.8 million home loan borrowers, the Commonwealth Bank knows more than most about the sensitivity of interest rate movements.

Each percentage point in home loan interest rate margin is worth a whopping $3.51 billion. Therefore, low bad debts and a net interest margin of 2.09% over the past 12 months is the key to its stellar earnings.

When the world’s seventh most valuable listed bank reports a record pre-tax profit of $US10.4 billion, you know it must be onto a good thing.

The story of the Commonwealth Bank’s extraordinary profits is one of market share, market power, credit quality and huge volume growth on home loans ever since Paul Keating introduced compulsory superannuation.

Australians are the world’s most indebted householders in the world, partly because of our ridiculous property bubble and partly because we’ve been on a debt-funded consumption boom based on the assumption that compulsory super will deliver enough cash in future to pay down the over-sized mortgages. As a nation, we still aren’t storing much away in the way of real net savings. We don’t have a sovereign wealth fund and the growth of superannuation balances has barely kept up with the growth in mortgage lending.

The biggest winner from Keating’s superannuation system has been shareholders in the Big Four banks, which are today capitalised at almost $US300 billion — a milestone never reached before.

No other country has banks as four of their five most valuable listed companies and that is thanks to our home loan obsession combined with a compulsory super system that has generated a hugely profitable churn for financial intermediaries but not much in the way of real national savings.

Having privatised the Commonwealth Bank for about $10 billion in three tranches between 1991 and 1996, it is hard to see any possible justification for its government-mandated business to now be worth almost $US94 billion after another 1% gain today.

Taxpayers received just $5.40 a share when the first 30% was floated in 1991 and the stock jumped 56c to $56.69 in morning trade.

John Howard’s full privatisation of the Commonwealth Bank in mid-1996 was the moment when the Big Four transformed into a gouging oligopoly imposing the world’s most expensive banking system on long-suffering Australian consumers. They were allowed to snap up all the serious smaller competitors and now dominate with a combined 86% share of Australia’s $1.4 trillion mortgage market.

Former NAB CEO Don Argus is right to criticise CBA and Westpac for having transformed themselves into giant building societies. So much for oiling the wheels of business and enterprise, CBA’s $542 billion loan book is dominated by those $351 billion worth of low-risk home loans which come with personal guarantees, unlike the sub-prime market in the US.

Terry McCrann is absolutely correct when he writes in the News Limited tabloids today that it is better to have our Big Four banks than teetering Spanish or Greek banks. But how much profit is too much, Terry?

These last 10 years of bad debt provisions show just how prudent our biggest bank has been when it comes to discipline on credit quality:

  • 2002-03: $305 million
  • 2003-04: $276 million
  • 2004-05: $322 million
  • 2005-06: $398 million
  • 2006-07: $434 million
  • 2007-08: $930 million
  • 2008-09: $2.935 billion
  • 2009-10: $2.711 billion
  • 2010-11: $1.28 billion
  • 2011-12: $1.09 billion

This is far better than 1991 when the 100% government-owned CBA was caught as the biggest single lender to News Corp during its debt crisis.

Thankfully for Rupert, his special relationship with the bank, and especially with Keating, saw strong support in his hour of need and long-serving Australian lieutenant Ken Cowley was later appointed to the CBA board in 1997. The full story of Rupert and the CBA has never been properly told.

Having got through Keating’s recession we had to have which caused $30 billion of write-offs across the Australian banking system, CBA was very proud to declare its maiden dividend of 20c in early 1992.

Fast forward to 2011-12 and shareholders will this year receive a total fully franked payout of $3.34 per share. That’s a one year yield of 61.85% for those who bought into the original float. No wonder long term CBA shareholders such as Gough Whitlam have done very well indeed.

The federal government is on the giggle as CBA will this year pay a record $2.75 billion in company tax, which brings the $9.9 billion gross profit down to the widely reported net figure of $7.1 billion.

Accounting standards aside, I’m still mystified how the bank can claim — and loyal supporters like Terry McCrann happily repeat — that it’s return on equity was “only 18.6%” in 2011-12.

The bank prefers analysts to look at its cash earnings and we should also follow the cash when assessing return on equity. The truth of the matter is that the Commonwealth Bank’s 800,000 shareholders have paid net nothing for their current $US94 billion of equity.

Sure, they did stump up $10 billion to buy the bank when it was privatised. And yes, CBA did raise almost $5 billion of new equity during the GFC. Similarly, it is true that 351 million new CBA shares were issued to the owners of Colonial when that business was bought in June 2000.

But when you consider that the bank has spent more than $40 billion in cold hard cash over the past 20 years buying back its own shares and distributing profits to its owners, shareholders as a whole have already received far more back from the bank than they ever put in.

Shame about all those customers who are still getting ripped off blind contributing $33 billion a year in pre-tax profits to the Big Four.