Crisis helps big banks reap bigger returns
By Jacob Saulwick | smh.com.au | 25 September
It has been a good financial crisis for Australia's banks, who continue to chalk up profits above the average of the past 20 years, helped by increased returns from home lending.
A report by the Reserve Bank yesterday showed that, for the profits of the major banks, the crisis of 2008 was barely as bad as the downturn in 2000, let alone the recession of the early 1990s.
The profitability of the banks has been helped in the past year by boosted margins in their bread-and-butter business – taking deposits from and writing loans to households.
Compared to its last review in March, the Reserve's half-year Financial Stability Review depicts a financial sector in good health. But it is also likely to heighten calls for government measures to address the market power of the major banks.
There is increased speculation the Government is poised to announce new initiatives to help prop up competition. Its $8 billion program to support smaller lenders is due to expire, and industry is lobbying hard for an extension.
Yesterday's review shows that a major factor helping the profitability of the banks has been their ability to extract more profit from home lending and deposits.
The impact has been particularly pronounced because the major banks have grabbed business from their smaller competitors.
"Because Australian banks focus on domestic lending, their profits continue to be underpinned by growth in net interest income," the Review said.
"For the major banks, net interest income increased by 22 per cent over the past year ... as a result of the ongoing expansion of their balance sheets."
The Reserve's positive tone is another indication the central bank is set to start increasing interest rates. If it does, there will be another bout of controversy should banks pass on heftier rate rises. The Reserve says that the cost of borrowing for banks continues to improve.
"Funding conditions have improved considerably over the past six months as market sentiment has recovered from the extreme risk aversion of late 2008 and early 2009."
The four major banks recorded profits of about $8.6 billion in the latest half year, described as a "strong" result by the Reserve. Their main worry has been increased provisions for bad loans, which have risen from $9.4 billion to $17.7 billion.
But with households benefiting from low interest rates and government cash payments, only a smidgen of the bad loans were for home mortgages.
"The available evidence suggests that only around 7 per cent of these related to residential mortgages, despite mortgages accounting for about 60 per cent of total (consolidated) lending," the Review says.
Apart from in Western Australia, the number of households falling behind on their mortgage repayments is falling.
"On any measure existing Australian homebuyers are better placed at present than homebuyers pretty well anywhere on the planet (extraordinary dust-storms notwithstanding)," said Macquarie interest-rate strategist, Rory Robertson.
Interestingly, the arrears rate for customers from credit unions is at 0.15 per cent, well below the arrears rate for banks at 0.62 per cent.
The chief executive of industry association Abacus, Louise Petschler, called on the Government to change the fee structure for its bank guarantee, which disadvantaged smaller lenders.
First published by Smh.com.au on September 25 2009
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