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Australian banks highly profitable: RBA

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Nila Sweeney

Despite claims of losses brought by the sub prime crisis, major banks in Australia remain highly profitable by international standards according to the Reserve Bank of Australia.

Philip Lowe, assistant governor (Financial System) with the RBA said that over the most recent six-month reporting period, profits after tax (and outside equity interests) for the five largest banks jumped by 12½% compared to a year ago and were double those of five years ago.

Lowe said that while some decline in total profits is expected by banking analysts, their forecasts suggest that the annualised after tax return on equity for the largest banks over the second half of the year will still be around 15%, not that far below the average of the past decade.

However, Lowe noted that Australian banks have been affected by the higher funding cost as a result of global credit crunch.

"These higher funding costs have been passed onto borrowers, with mortgage rates increasing by around 55 basis points more than the increase in the Reserve Bank's cash rate over the past year," he said. "They have also had a considerable impact on the competitive dynamics in the system, with lenders financing mortgages through the securitisation market facing a more significant increase in their costs than have the banks.

At current spreads, Lowe said that these lenders face difficulties in making profitable prime housing loans at the rates that the banks are charging for these loans. As a result, their share of approvals for new owner-occupied housing loans has fallen from around 13% in the middle of last year to just over 4%. Conversely, the share accounted for the banks has increased significantly.

On the bright side, Lowe added that these changes in the competitive position of different lenders are probably best thought of as cyclical, rather than structural. This means at a time when risk is being repriced and uncertainty has increased, those lenders relying most heavily on the capital markets have suffered a decline in their competitive position.

"When conditions improve, as they inevitably will, these lenders will find that their competitive position also improves," he said. "In the meantime, the extent to which banks are able to increase their borrowing rates is constrained both by competition amongst themselves, and the fact that higher margins make it more likely that lenders funding through the securitisation markets will again find it profitable to make housing loans. A widening of margins also risks raising the ire of the public."

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