By Chris Zappone
Australia's banks are in a better position to weather the global financial crisis than those in many other countries, the Reserve Bank says, and the Federal Government's guarantees on customer deposits and bank funding are working.
The RBA said the initiatives had helped to reassure consumers about the safety of banks, even as lending institutions posted profits pushed lower by the ongoing global financial crisis.
"With the safety of deposits no longer a notable concern for the public, the period since the introduction of the guarantee has seen continued strong deposit growth," for banks as a whole, the central bank said in its semi-annual Financial Stability Review released today.
However, the RBA acknowledged weaker profits, adding a caveat about slumping earnings to its mantra about the strength of Australia's banks contained in its September stability review and repeated more recently in its March board minutes."The banks continue to report solid profits, albeit lower than in recent years, are soundly capitalised, and the larger banks have high credit ratings," the RBA said.
The review showed "the RBA believes Australian banks' loan portfolios remain stronger than in many other countries'' wrote economist Katie Dean of ANZ Bank in a note to clients, highlighting the central bank's view that "there is little evidence of an economy-wide credit crunch'' even though "credit is more expensive.''
"This is the key to our view that official rates will not fall as low in Australia as in other economies,'' she wrote.
The stronger equities prices in the past weeks have lowered expectations of a further rate cut in April. The market is currently betting on a 25 basis-point cut to the interest rate, currently at the 40-year low of 3.25% according to Credit Suisse.
Over the next year, investors foresee only 44 basis points of cuts to the interest rate, down from 84 expected last week.
Earlier in the day, RBA head of economic analysis, Anthony Richards, told the fourth annual Housing Congress in Sydney that the 400 basis points of cuts made to the interest rate since September were improving home affordability "very significantly''.
"The recent sharp improvement in housing affordability clearly mostly reflects the sharp fall in mortgage rates over the past half year,'' he said.
Despite the relative health of Australian banks, "the banking system is facing a more difficult environment than it has for some years," the RBA said, with banks' non-performing assets ticking up past 1% at the end of 2008, from about 0.5% at the end of 2007.
The RBA acknowledged the impact of the Federal Government's deposit guarantee, saying bank deposits had grown at an annualised rate of 20%, "around the fastest rate for many years", reflecting both increased competition for deposits by banks and risk-wary consumers looking for a safe place to park their money.
"Both household and business deposit flows have been above average, with growth in term deposits particularly strong," the RBA said, which was borne out in the latest Westpac/Melbourne Institute surveys showing that a third of households viewed banks as "the wisest place for savings".
The Government's guarantee on wholesale funding has also received a warm welcome by lending institutions since it was enacted in November, in the aftermath of US investment bank Lehman Brother's implosion.
"Since these arrangements have been in place, Australian banks have issued $85 billion of long-term debt," the central bank said. That compares to just $3.5 billion in the three months to November, when the global financial crisis ratcheted up the fear of lending between global banks.
Of the $85 billion in debt issued by Australian banks, all but $4 billion has been issued under the voluntary scheme, the RBA said.
"The recent pattern of capital market issuance has seen the banking system reduce its reliance on short-term capital market funding," it said.
Although credit spreads have improved since the guarantees were put in place, "spreads on wholesale funding remain well above pre-crisis levels, although lower than in late 2008".
The difference between the yield on a three-month bank bill and the overnight index swap rate for the same maturity is at about 30 basis points, down from a peak of 90 basis points in October when the global financial crisis accelerated, according to the stability review. The spread is also lower than the average of 45 basis points in the preceding months of the crisis, the bank said.
However, it remains above the 10 basis point spread common before the crisis emerged, the RBA said, which can be traced back to late 2006.
"While banks have been able to tap capital markets and attract strong inflows of new deposits, conditions in the asset-backed commercial paper and residential mortgage-backed securities markets remain difficult," the RBA said.
Those were the first markets hit by the credit crunch, the bank said, noting that as of December last year, the outstanding value of asset-backed commercial paper issued by Australian entities fell 45%, or $40 billion, lower than its mid-2007 peak.