Australia’s financial system gets the tick of approval by the RBA

The RBA this week released their half-yearly Financial Stability Review and overall it was quite a positive release.  The report can be downloaded here:

The headline findings of the review were:

  • Since the last review six months ago, confidence in the banking systems of major countries have generally improved
  • Share prices of banks in the major overseas markets tended to increase over much of the last six months in line with continuing economic improvement however, recent natural disasters and tensions in North Africa and the Middle East have slowed the increase recently.
  • The major international banks have continued to report profits and strengthen their balance sheets. Some banking systems (particularly in Europe) are still under considerable strain, where recovery is being undermined by market concerns about sovereign debt sustainability.
  • The Australian banking system has continued to outperform many other countries, consistent with the relative strong domestic economic conditions recently.  The number of non-performing assets is higher than they were pre GFC but they continue to improve. For the largest banks, profitability has now recovered to near pre-crisis levels.
  • Australian banks have maintained ready access to wholesale funding markets in the past six months however, the need to raise wholesale funds over this period has lessened as growth in deposits continues to outpace growth in credit. This is reflected by households paying down debt and increasing their savings in recent times.
  • The growing economy is improving the financial position of the household and business sectors in Australia. Both sectors continue to exercise a cautious approach to borrowing than prior to the crisis, with businesses deleveraging significantly and households reducing the growth in their debt outstanding to a rate more in line with income growth.   Despite the increases to savings and households paying down more debt, household indebtedness remains historically high and recent increases in interest rates have lifted the aggregate debt servicing requirement. While indicators of financial stress are relatively subdued, the RBA would like to see households continue to borrow less and pay down more of their debt.
  • It appears that the strong growth in the financial system pre-GFC is unlikely to occur again.  The rapid improvement during that time was due to financial deregulation and a lower level of inflation in recent years.  If the RBA’s view is correct, then banks’ domestic growth opportunities will be more limited in the years ahead.  If financial institutions therefore attempted to return to their earlier rates of growth, they may take unnecessary risks that may be difficult to manage. Maintaining a more moderate pace of balance sheet expansion, particularly one that is more easily able to be funded by deposits, will also assist in further strengthening bank funding profiles.

All in all it looks as if the Australian economy and financial system is performing quite well.  It seems as if banks are increasing their deposits as households save more and pay down their debt, as a result their reliance on other sources of funding are lessened.  The comments suggest that the RBA would like households and businesses to continue their cautious approach and pay down more of their debt.  It also seems as if growth in banks profitability and revenue is not likely to return to those levels recorded before the GFC.

Should consumers continue to take a more conservative approach and look to pay down debt and save more it is likely to result in fewer property transactions and lower levels of growth.  In saying this, we expect lower levels of capital growth going forward.  As has been the case with the rapid growth in the financial system prior to the GFC, the rapid growth in property values recorded during the past decade is unlikely to continue.

Mortgage arrears in Australia also remain at very low levels, the report highlights: ‘the household sector is coping reasonably well with its debt levels and higher interest rates. While arrears rates on mortgages are higher than the low levels reached during the late 1990s and early 2000s, they remain low by international standards (Graph 3.8). By loan value, the share of non-performing housing loans on banks’ balance sheets was around 0.7 per cent in December 2010, broadly unchanged since March 2010, and up 6 basis points from December 2009; the vast majority of these loans are well covered by collateral. Arrears on securitised housing loans were also stable in 2010, at about 0.7 per cent, though these data are becoming less representative of overall housing loan quality given the gradual decline in residential mortgage backed securities outstanding (down about 47 per cent from the peak in 2007).’

Non performing housing loans

Non performing housing loans

What do you think, is the financial system as stable as the RBA suggests, or is everything not as rosy as it seems?  We would be interested to hear your thoughts.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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One Response to Australia’s financial system gets the tick of approval by the RBA

  1. Nomad March 25, 2011 at 4:10 pm #

    House prices are stabilising, with crash and boom off the table for the time being. We’ll experience moderate rises in most cities except Perth where we’ll see slight falls, nothing dramatic. Must say the bears made many bad calls (I include myself) and I only wish I would have predicted the unfair government stimulus to save the housing market. The stimulus was wholly unexpected. Nobody could have predicted it. Most bulls and bears now posting on thankfully believe in a stable outlook. The debate has calmed down, with neither side expecting large movements in either direction. The discussion has moved on to how long the stagnation will last before prices resume a definite direction (down or up). Something must be done to address the supply issue. There’s no doubt a shortage exists and is worsening. Rents and prices in my town (Perth) continue rising (undersupply). Don’t know what may happen population ramps up once more, a scary thought. Global citizens fleeing their depressed economies may wish to live in Australia. We should do everything possible to welcome migrants, but I worry about the upward pressure this places on house prices and rents.
    Bubblepedia Blog

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