The health of Australia’s financial system will get a big tick this week in the Reserve Bank’s first report on financial stability for 2014, to be released later today.
While there will be mention of possible measures to control home lending and prices (which will get much of the publicity) because the RBA has already mentioned such possible measures, the real story will be in how stable the financial system remains.
Data and commentary from the RBA and its researchers will confirm the housing recovery is the dominant factor in the domestic economy and will continue for the rest of this year and into 2015.
The health of the big banks remains the key feature of the report (as discussed by the RBA board at its regular meeting earlier this month).
"The Australian banking system continued to perform strongly and remained well capitalised. Banks’ asset performance had improved further," the minutes of the board meeting said last week.
"In line with this, their bad debt charges had declined and this had supported profitability.
"The major banks therefore appeared well placed to use internal capital generation to meet the higher capital requirements that they would face from 2016, having been designated by APRA as domestic systemically important banks," the minutes read.
But there was also a warning for investors about the future health of bank profits.
"There was, however, less scope for future profit growth to come from further declines in bad debts or other costs, as they were already at low levels," the minutes explained.
That’s certainly something we saw in the Commonwealth Bank’s interim report and in the first quarter updates from the ANZ, NAB and Westpac.
Looking at the housing recovery, the minutes said, "Rising housing prices and household borrowing were expected results from the monetary easing that had taken place. While these factors were helping to support residential building activity, they also had the potential to encourage speculative activity in the housing market.
"Lending to housing investors had been increasing for some time in New South Wales, and over the past six months it had also picked up in some other states," the minutes said.
For NSW to be highlighted in the minutes means the bank is more than just watching the situation and is concerned the situation in that state is generating a rising level of official concern.
"While such a pick-up would be unhelpful if it was a result of lenders materially relaxing their lending standards," the bank said. "Current evidence indicated that there was little sign of this occurring."
"Members noted that the recent momentum in households’ risk appetite and borrowing behaviour warranted close observation, but agreed that present conditions in the household sector did not pose a near-term risk to the financial system.
"Members discussed the experience in other countries where macroprudential tools had been utilised to slow demand for established housing and their possible application in Australia," the bank said.
New Zealand is the country closest to Australia where limits on loan to valuation ratios and other controls have been or are being used to try and take the heat out of that country’s booming housing market.
That’s also important because the big four Australian banks dominate the NZ economy (more than they do here), accounting for more than 80% of financial activity, especially home lending.
The bank said the demand for credit by businesses remained soft "but this sector was no longer deleveraging. Indicators of distress in the business sector continued to decline, particularly the amount of non-performing loans related to commercial property".
"Prices of CBD office property had been rising in a few cities despite softening rents, which was consistent with some investors searching for higher yields," the minutes added.
And we should remember that the banks always get into trouble with commercial loans, not housing loans, where there’s a credit crunch or downturn. That’s what happened in the GFC.
