By Eric Johnston
WESTPAC chief executive Gail Kelly has given the strongest indication yet that the bank may not be able to pass on any future interest-rate cuts in full while Europe's economic turmoil continues to play havoc with global markets.
She also sounded a warning of the possibility of credit rationing if conditions in Europe remained strained. Such a move would have a profound effect on the economy, particularly among small and mid-sized businesses and the construction sector, which rely heavily on bank funding.
Westpac's Gail Kelly says global money markets have 'effectively closed'.Credit: Glenn Hunt
Her comments yesterday coincided with a top Reserve Bank official saying the domestic economy would inevitably suffer spillover effects from the government debt crisis in Europe. However, Reserve Bank deputy governor Ric Battellino said Australia was one of the best placed to withstand the impact of the crisis, as it had few direct trade links with Europe, government finances remained strong and the banking system was resilient.
Still, as the euro-zone sovereign debt crisis grinds on, bank executives here are bracing for the worst and are likely to take more aggressive steps to protect their profitability as funding costs rise.
Investors are bracing for the prospect of a wave of credit-rating downgrades across several euro-zone countries in coming weeks, despite the deal struck on the weekend for deeper economic integration across the region.
Speaking to reporters after Westpac's annual meeting in Sydney, Mrs Kelly warned that global money markets - which remain a key source of funding for Australian banks - had ''effectively closed''.
''As a direct result of the turmoil going on around the world, funding has become amore difficult issue,'' Mrs Kelly said.
''And when they open up, our estimation is that the cost of raising money will actually be more than it was at any point during the global financial crisis,'' she said.
While Westpac was ''significantly stronger'' than it was going into the financial crisis three years ago, Mrs Kelly suggested that the turmoil was likely to affect borrowers because the bank had to balance economic realities before passing on any future Reserve Bank interest-rate cuts to customers.
Politicians have piled pressure on lenders to pass on interest-rate cuts in full, but banks argue that the central bank's official rate influences only a fifth of their funding cost and that they should therefore be free to decide rates.
Westpac has passed on in full the Reserve Bank's past two 25-basis-point rate cuts, although Mrs Kelly revealed that the cut the bank made last week was a ''finely balanced'' decision.
Separately, incoming Westpac chairman Lindsay Maxsted strongly supported Mrs Kelly's ''multi-brand'' expansion strategy, although he acknowledged that the program had its doubters.
Some investors have questioned whether the costly investment program remains the right one, given the subdued outlook for credit growth.
''This strategy is a good strategy … there are still some disbelievers out there and part of it goes to the heart of whether we can turn customer-centric, multi-brand strategy into real bottom-line returns,'' he said.
''I think if you read the numbers you can see that's happening already.''
Mr Maxsted takes charge from Ted Evans, who yesterday retired from the board after five years as chairman.
Westpac rival National Australia Bank is scheduled to hold its annual meeting today, while ANZ fronts shareholders tomorrow.