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The following is a transcript of a video titled "Wading through the banking jargon". The video can be found here.

Nicholas Grove: We are so often told that we shouldn't invest in companies that we don't understand, but as first-time investors will discover, understanding terms used by Australia's banking sector can often be a daunting task. Here to help us navigate these waters, I'm joined by Morningstar head of banking research David Ellis. David, thanks for joining us.

David Ellis: It's a pleasure, Nick. Thank you.

Grove: I guess it makes sense to start at the beginning of the alphabet. What does the bank mean when it refers to asset quality and bad and doubtful debts?

Ellis: Asset quality is crucial and it's crucial to bad and doubtful debts, and crucial to bank profitability. Asset quality, as the term suggests, is a measure or description of how strong and how secure banks loans are. So when we are in a period of poor asset quality, that means there is a high proportion of loans that are in arrears, that borrowers are struggling to repay their loans, and there is a high proportion of commercial or corporate borrowers that are going into default or going out of business. So, the poorer the asset quality, the bigger the negative impact on bank earnings, on bank profitability.

Grove: David, when it comes to the financial results of the "Big Four," we often read about cash earnings. Now, how does this measure differ from net profit, which is usually the first thing we read about when we read about the results of other non-bank companies?

Ellis: Net profit is really referring to reported profit or what we call statutory profit. Cash earnings with banks relates to their underlying sustainable earnings and it strips out or removes non-cash items, such as amortization charges of intangibles, non-significant items, consolidation adjustments. Also the banks, because of the nature of the business, have profit and loss impacts relating to hedging activities. Those profit and loss impacts are stripped out of the reported profit to arrive at cash earnings. So, the cash earnings is an attempt to identify the ongoing or the underlying earnings when you take out these one-off items.

Grove: What is a bank referring to when it refers to impairment charges?

Ellis: Well, impairment charges gets back to when I was talking about asset quality. So, impairment charges are effectively bad debts. Now, what goes through the bank's profit and loss accounts for impairments are really provisions, the changes to provisions for bad debt. So it doesn't reflect actual bad debts written-off, or in some cases, bad debt that have been previously written off that have been actually recovered. So, impairment charges that go through the profit and loss accounts are changes in the provisions, in net provisions for banks.