Explainer: Why scale matters so much in Australian banking

APRA’s latest banking statistics reveal a striking feature of Australian banking: smaller institutions can earn perfectly respectable lending margins and still struggle to make attractive profits.

The clearest comparison is between the major banks and APRA’s credit union and building society category.

At first glance, the problem does not appear to be interest margins.

Over the latest three-year period, credit unions and building societies generated net interest income equivalent to 2.08 per cent of assets, compared with 1.64 per cent for the major banks.

Their estimated housing loan-to-deposit spread was also remarkably similar: 1.87 percentage points, compared with 1.94 percentage points for the majors.

That is a difference of just seven basis points.

The real divergence appears further down the income statement.

Operating expenses for credit unions and building societies were equivalent to 1.97 per cent of assets. For the major banks they were just 0.97 per cent.

Put another way, the smaller institutions generate 44 basis points more net interest income per dollar of assets, but incur around 100 basis points more operating expenses.

That difference flows directly into profitability.

Credit unions and building societies recorded a cost-to-income ratio of 81.5 per cent. That means more than 81 cents of every dollar of operating income is absorbed by operating expenses. For the majors, the figure was just 50.6 per cent.

Their respective profit margins were therefore 12.3 per cent and 32.4 per cent, while return on equity was 4.1 per cent compared with 11.2 per cent.

This is the economics of scale at work.

Banks need technology systems, cybersecurity, regulatory compliance, risk management, payments infrastructure, finance functions, branches and administration regardless of their size. A major bank can spread many of those costs across hundreds of billions of dollars of assets and millions of customers.

A much smaller institution cannot.

The APRA figures do not tell us exactly which expenses account for the difference. But they show clearly where the profitability gap emerges.

The smaller institutions’ central problem is not necessarily what they earn from banking. It is how much banking costs them to provide.

Why scale matters in Australian banking
APRA profitability ratios — three-year average
Metric	Mutuals*	Majors
Net interest income / assets	2.08%	1.64%
Housing / deposit spread	1.87 pp	1.94 pp
Margins are remarkably similar: the estimated housing/deposit spread differs by only 7 basis points.
Operating expenses / assets	1.97%	0.97%
This is the key divide: operating expenses per dollar of assets are roughly twice as high for mutuals.
Cost-to-income ratio	81.53%	50.63%
Profit margin	12.33%	32.35%
Return on equity	4.06%	11.23%
Similar lending spreads. Very different operating costs. Very different returns.
* Mutuals refers here to APRA's credit union and building society category. Source: APRA Quarterly Authorised Deposit-taking Institution Performance Statistics, June 2026. Ratios shown are three-year averages.