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Australia: The party's over for Australian banks

Despite record profits, Australian banks face difficulties in the year ahead. Albert Smith looks at how the four major banks are positioned to handle a radical shake-up of the banking industry.

Australian banks have emerged from their most prosperous year - reporting record profit growth and strengthened balance sheets - but face considerable turmoil in 1996 and the years beyond.

The profit story of the banks has been impressive. In the reporting season which ended in November, all four major banks reported considerable gains. The combined profit of these banks was a $4.95 billion (US$3.6 billion) after taxation - a 15.2% improvement over the previous year's a $3.9 billion. Many of the smaller regional banks reported similar gains.

Perhaps the most notable feat of the bigger Australian banks in the past three years has been the repair of balance sheets that were badly mauled in the asset-price slump that followed the worldwide stock market crash of October 1987. Since the massive write-downs of the early 1990s, the banks have been so successful at strengthening their capital bases that one or two of them - notably Westpac - might contemplate returning capital to shareholders.

With such strong performances behind them, the banks might have reasonably expected more of the same. But going into the new year, increasingly fierce competition in the domestic market, where margins have already tightened, will certainly inhibit profit growth.

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