Australian banks have been stress tested both by regulators (AirDaily yesterday’s report) and by the stockmarket since the credit crunch started.
And they have passed the real tests, but been marked down by the nervous market which has been more focused on overseas sentiment (and helped by short sellers).
We will need our healthy banks if the $US700 billion should fail to pass the US Congress in the next few days and markets shudder. But is heading for approval, according to the latest reports.
There’s a great deal of fear and loathing abroad, especially since the collapse of Lehman Brothers (which is looking more and more like a major catalyst).
The Reserve Bank has constantly pointed out that the Australian banking system is sound, with little if any of the impact here that we have been seeing in countries like the US or UK.
But as the bank said, we are not immune there has been more upward pressure on interest rates as cash has gotten tighter.
Our banks are well capitalised, have low levels of bad debts and impaired assets while individuals and businesses have voted with their wallets by dumping billions of dollars of cash into the banks in short and longer term deposits.
But investors have taken a more jaundiced view.
The RBA points out that the banking sector on the ASX has fallen to be around 32% below its peak in November last year (when the ASX peaked).
There has also been a very pronounced increase in the volatility of bank share prices since mid 2007 with the daily absolute movement in the banking index averaging 2.3% over this period, compared with an average of 1% over the previous 10 years.
The largest movements occurred in July (of this year) , when the banking index fell by around 15% over three days, after the market was surprised by a couple of banks announcing higher provisioning charges.
The RBA points out that the fall in the Australian banking index since its peak has, however, been slightly less than the falls in the European and US banking indexes since their respective peaks, with these markets having declined by about 40%.
"Over a longer horizon, Australian banks have significantly outperformed many of the international peers."
The bank pointed out that the share prices of the companies included in the ASX ‘diversified financials’ index have been more volatile than for Australian commercial banks, with the relevant index declining by around 60% since its peak mid last year.
"The movements in banks’ share prices have resulted in significant changes in market-based valuation measures, with the banks’ price/earnings ratio falling to its lowest level since the mid 1990s and dividend yields rising equivalently.
"Each of the four largest Australian banks is rated AA by Standard & Poor’s, with these ratings having recently been affirmed. Of the world’s largest 100 banks, only a handful have higher ratings.
"Moreover, unlike some of the large financial institutions abroad, no Australian-owned bank has had its rating downgraded since the onset of the credit turmoil.
"A couple of foreign-owned banks operating in Australia have had their ratings downgraded," the RBA pointed out.
"In this difficult environment, Australia has benefited from having strong and profitable financial institutions with few problem assets on their balance sheets, and a sound regulatory regime.
"While the Australian financial system has not been completely insulated from developments abroad, it is weathering the current difficulties much better than many other financial systems," The central bank said yesterday in its bi-annual Financial Stability review, released yesterday.
And, yet there’s a cash drought as the banks are nervous, prefer to keep billions of dollars in accounts at the Reserve Bank and are reluctant to lend to anyone.
Short term money market rates are spiking and if the RBA doesn’t cut rates next month, we could be facing rate increases from banks nervous about their funding levels.
Several banks have already revealed high bad debt provisions, such as the ANZ and the National, which has provided over a $1.1 billion for possible losses on CDOs.
The Reserve Bank said that these higher charges are likely to see the banking system’s aggregate post-tax profits fall in the near term, "with analysts generally anticipating that the aggregate profits of the five largest banks will be around 10 per cent lower in the second half of 2008 than in the same period a year ago.
"If this were to occur, the annualised post-tax return on equity over this period would be around 16 per cent which, while lower than the average return over the past decade, would be much higher than that being earned in many other banking systems around the world and many other industries in Australia."
"While provisioning charges have increased, the Australian banking system continues to experience a low level of problem loans. As at June 2008, non-performing assets accounted for around 0.7 per cent of banks’ on-balance sheets assets, which is below the average since the mid 1990s.
"Only around half of the non-performing assets are classified as ‘impaired’, in that payments are in arrears by more than 90 days (or are otherwise doubtful) and the outstanding amount is not well covered by the value of collateral. (See the two graphs at the start of this story).
"Although the non-performing assets ratio is low, it has nonetheless increased over the past six months, with the rise evident across all the main segments of the domestic loan portfolio.
"The most notable increase has be
