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RBA Says Bad Debt Cycle Has Peaked
The Australian central bank, the Reserve Bank of Australia (RBA) says that bad debt charges faced by Australia’s major lenders appear to have peaked, and in doing so will help them maintain their position amongst the most profitable banks in the world.
According to the minutes of the most recent meeting of the RBA, held at the beginning of the month, when the central bank raised the official cash rate by 25 basis points, board members in debating the hike, pointed to the strength of the Australian financial system compared with international peers.
The minutes of the meeting also reveal concern expressed by RBA board members that despite the worst of the bad debt provision cycle having passes already in Australia, the global financial system could yet be surprised by a bad debt crisis in other countries.
“The main factor to watch in the period ahead would be bad debt charges, which were likely to remain high for some time and could rise further. Banks in Australia, Canada and Asia were doing considerably better than those in the US and Europe. Their profitability had generally improved recently after holding up relatively well during the financial crisis.” the minutes said.
The optimism expressed by the central bank echoes similar sentiment expressed by the majors with the exception of NAB during the recent earnings season, where they recorded better than expected profits.
“For the major banks in Australia, growth in net interest income had increased and provisions for loan losses appeared to have peaked at levels that were low by international standards. Non-performing loans were disproportionately in commercial property lending while impairment rates for housing loans remained low.” the minutes said.
The members of the rate setting committee of the central bank noted the increasingly bitter battle for retail deposits as Australian lenders prepare for more onerous liquidity and capital adequacy requirements.
Some lenders have begun offering term deposit rates in excess of mortgage rates, something which has not occurred for nearly two decades.
“Australian banks and other authorised deposit-taking institutions remained well capitalised, reflecting ongoing profitability and recent equity raisings, and had increased their holdings of liquid assets,” the minutes said. “The global focus on strengthening the deposit bases of banks and higher liquidity standards had seen increased competition for deposits, resulting in sharp rises in interest rates on term deposit specials.”
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