A week ago we reported on a speech by a senior Reserve Bank official who argued that Australian banks faced a few years of sluggish revenue and profits, thanks to slow lending growth, rising deposit levels, cautious consumers and low demand for money from business.
Yesterday that outlook was further filled in by the first of two Financial Stability Reviews for 2011 from the RBA and by the RBA Assistant Governor in charge of that review, Malcolm Edey who spoke in Sydney.
The graphs at the top and bottom of this story from last week’s report well illustrate the RBA’s comments and were used in yesterday’s Review.
Mr Edey’s final remarks in his speech summed up the FSR.
"Australian banks are in good shape, and they came through the crisis profitable and well capitalised.
"They have strengthened their liquidity positions and their use of deposit funding. Australian businesses have reduced their gearing.
"Households have raised their saving rates.
"When we think about what the post-crisis environment might look like, it seems unlikely that we’ll be going back to the days of consistent double-digit growth in credit that we saw in the pre-crisis years.
"That growth was driven in part by factors that can’t be repeated – the deregulation of the financial system in the 1980s, and the transition to low inflation in the 1990s.
"In the post-crisis environment, borrowers and investors are more cautious than they were, both at home and abroad.
"That’s likely to mean less demand for leverage and less growth in private balance sheets, even when the economy itself is growing strongly.
"If those trends continue, I think it will be good for financial stability, but it will also mean that our lending institutions have to get used to lower rates of expansion than were typical in the pre-crisis years."
And there you have it and why the Air Weekly of last Friday told you first.
Banks will increasingly become income plays only, the concept of target prices so beloved of analysts and fund managers, will become irrelevant.
Cost cutting will become endemic, and we will hear more about expansion offshore (beyond NZ) such as the ANZ is attempting in Asia, the NAB has in place in the UK, and the CBA which has a modest investment in Indonesia and China.
That will be an attempt to get profit growth above Australian domestic levels and share price growth, but regulators will make sure that doesn’t come at the expense of higher risk, as the RBA made clear yesterday as it sketched in a patchy future for the banks that they have yet to acknowledge to the market.
"As the global economy moves beyond the initial recovery phase, the challenge for financial institutions and regulators in Australia will be to manage an expansion under post-crisis conditions.
"The very rapid growth in the financial system over the years that preceded the crisis seems unlikely to be repeated, since to a significant degree it represented a one-time adjustment to financial deregulation and the shift to low inflation.
"If that view is correct, then banks’ domestic growth opportunities will be more limited in the years ahead.
"There is no reason why the financial system cannot adapt smoothly to a slower rate of expansion, but if industry participants were to attempt to return to their earlier rates of growth, they could be induced to take risks that may subsequently be difficult to manage.
"Maintaining a more moderate pace of balance sheet expansion, particularly one that is more easily able to be funded by deposits, will also assist in further strengthening bank funding profiles.
"As yet, there is little sign that banks have been significantly relaxing their lending standards in a bid to stimulate credit growth.
"However, increasing competition in housing loans is starting to put pressure on lending standards.
"Some banks raised their maximum loan-to-valuation ratios in the second half of 2010 and early 2011, though this followed a period in late 2008 and early 2009 when many banks were tightening these criteria.
"The share of non-standard and line-of-credit loans declined as a share of new mortgage lending in late 2010 for some major banks, although this could partly reflect weaker demand for such loans.
"The responsible lending requirements of the National Consumer Credit Protection regime, which came into effect for authorised deposit-taking institutions (ADIs) on 1 January 2011, should help limit any undue loosening in household lending standards," the central bank said.
While the continuing growth in deposits can be seen as a negative by some, overall it is a big positive in that it has boosted the banks’ balance sheet strength by cutting the reliance on wholesale markets here and overseas which froze in the crunch.
The RBA said that since 2007, short-term, wholesale funding has fallen from around one third to one fifth of funding, while the share of deposits in total funding has risen by around 10 percentage points to 47% since early 2008.
"Australian banks have maintained ready access to wholesale funding markets in the past six months, but they have also had less need to raise wholesale funds over this period as growth in deposits continues to outpace growth in credit.
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