Amid all the talk of higher bank profits, there is one institution which saw its financial position go from a record result in 2009, to a huge loss in the year to June with a $US11 billion turnaround.
In fact this institution will probably be the biggest victim of the sharp rise in the value of the Australian dollar and the huge loss was the biggest ever reported by this bank in its 50 year history.
And the stronger currency pushed the bank’s underlying earnings to a 28 year low, in fact the lowest since the dollar floated in late 1983.
On the day when the ANZ reported a sharp rise in its profit and dividend to shareholders and a day after the NAB reported a similar result, the Reserve Bank of Australia has revealed a loss of $2.928 billion for the 2009-10 financial year.
But the report also confirms the sharp improvement in the Australian economy from the 2009 financial year when it bought $45 billion of self-securitised home loan mortgages from the banks to help them through the final quarter of 2008 after Lehman Brothers failed, devised a $10 billion deposit scheme at the bank to help the financial markets maintain liquidity and printed around $10 billion extra in new notes because of a run on cash from nervous consumers.
The 2009-10 financial year was much quieter, except for the sharp rise in the value of the Aussie dollar, especially in the last weeks of the financial year after a sell-off in May as the euro crisis deepened.
And it was the rise in the value of the dollar in the year to June that did the damage to the RBA’s profits and accounts.
According to the RBA’s annual report, released yesterday (and late because of the Federal election and the new Parliament) the loss was a $11.7 billion fall from the record 2009 year when it earned $8.806 billion.
Unlike the NAB and the ANZ, which upped payouts to shareholders, the loss has meant no payout to the Federal Government, and it’s very likely the payments this year and in the next couple of years will be low because of calmer conditions in the markets and the need to rebuild reserves.
The RBA said "Underlying earnings of $866 million, $1,284 million ($1.28 billion) less than in 2008/09 as interest rates around the world were, on average, lower than in the previous year and the appreciation of the exchange rate meant that foreign interest earnings were worth less in Australian dollar terms.
"At this level, underlying earnings were lower than had been the case since 1982/83.
"Realised valuation losses of $128 million, comprising losses on foreign exchange of $358 million, partially offset by gains of $190 million realised on the sale of foreign securities and of $40 million on domestic securities.
"Unrealised valuation losses of $3,666 million ($3.66 billion), reflecting an appreciation of 12 per cent in a measure of the exchange rate weighted by the composition of Australia’s international reserves."
The bank said the "net accounting loss was absorbed by: a transfer of $2,248 million from the Unrealised Profits Reserve, which exhausted the balance of this reserve; and a transfer of $680 million from the RBRF (The Reserve Bank reserve Fund).
"Reflecting these results, no dividend is payable to the Australian Government from the Reserve Bank’s profits in 2009/10.
"However, the sum of $750 million deferred from the dividend payable in 2009/10 and as such a liability of the Bank, was paid to the Government in August 2010."
The bank explained that with the balance in the Unrealised Profits Reserve and underlying earnings being exhausted in absorbing the valuation loss in 2009/10, the bank will seek to rebuild the Reserve Fund to a level it is comfortable with.
"While the Board’s policy is to hold a balance in the RBRF at a benchmark ratio to the risk held on the balance sheet, this ratio is regarded as a target, not a minimum requirement, consistent with the RBRF remaining available to absorb losses when necessary.
"The Board has pursued its policy towards the RBRF for a number of years in anticipation that a large valuation loss was likely to occur at some point, given the constraints faced by the Bank in managing market risk on its assets in a floating exchange rate environment.
"Since the transfer of $680 million from the RBRF in 2009/10 has reduced the balance of this reserve to $6,183 million $6.183 billion), a level modestly below that which the Board regards as desirable in the long term, the Board will seek to replenish the reserve from earnings in future years.
"Consistent with the Reserve Bank Act, such transfers to the RBRF are determined by the Treasurer in consultation with the Board.
"The loss taken to the RBRF in the latest year is slightly larger than the transfer of $577 million to this reserve from earnings in 2008/09."
And why the loss from the dollar, well the bank says that "as the custodian of Australia’s official foreign reserves, has a very large open foreign currency position."
It cannot hedge that position. In years when the Australian dollar changes against the currencies of countries in which the reserves are held – the United States, Japan and the euro area – the value of those assets measured in Australian dollar terms changes.
"In 2008/09, as the Australian dollar fell, these valuation effects were strongly positive, and the Bank’s earnings were consequently the highest in its history. As last year’s annual report made clear,
