Australian banks are seeing a “relentless” increase in costs even as they shift their reliance to deposits from wholesale funding, Australia and New Zealand Banking Group Ltd. Chief Executive Officer Phil Chronican said.
The cost of funding has “gone up and up, although it has stabilized this year,” Chronican said in an interview on the Inside Business program on the Australian Broadcasting Corp. “We’re refinancing this year borrowings that were made three, four and five years ago at materially lower costs.”
The cost of retail deposits hasn’t fallen by as much as the cash-rate target, as banks haven’t reduced the rates they pay customers to the same extent as the central bank’s cuts, Chronican said.
The lenders have reduced reliance on wholesale markets since the collapse of Lehman Brothers Holdings Inc., with deposits swelling to 53 percent of funding this year, the biggest share since 1998. ANZ Bank has yet to respond after the Reserve Bank of Australia reduced its benchmark rate by 25 basis points on Oct. 2. National Australia Bank Ltd. and Commonwealth Bank of Australia passed on 20 basis points of the cut to borrowers, and Westpac Banking Group 18 basis points.
Profits in Australia’s financial services industry rose 3 percent in the three months to June 30, bringing the increase in the past 12 months to 20 percent, statistics bureau data show. Mining earnings fell 1 percent during the quarter and 18 percent from a year earlier as export demand waned on slowing growth in China.
Unlike banks in many other developed economies, “no Australian bank had to be bailed out by taxpayers, no Australian depositor had their savings put at risk,” Treasurer Wayne Swan said in his weekly economic note yesterday. “No investor in a rated Australian mortgage-backed security ever lost a cent of principal.”
The lenders would weather a slowdown, and only unprecedented levels of loan losses would force them to raise new capital, Moody’s Investors Service wrote in a Sept. 18 report.
“Strong profitability and capital levels, together with solid asset quality, have positioned the major banks well for an unexpected economic downturn,” wrote Ilya Serov, a vice president and senior credit officer at Moody’s.
Australian retail sales climbed 0.2 percent in August, half the pace forecast by economists, as weaker demand at household-goods outlets and restaurants offset a rebound in spending at department stores. The nation’s building industry shrank in September by the most in 12 months, led by a deepening downturn in residential and commercial construction.
RBA Governor Glenn Stevens last week signaled weaker growth at home and abroad, reflected in lower prices for Australia’s key exports of iron ore and coal, as Europe’s fiscal crisis weighs on global growth.
“The International Monetary Fund has indicated it’s likely to cut its forecast for world growth this week because of deterioration in global conditions in recent months,” Swan said. “While weaker global demand inevitably impacts on our economy and government tax revenues, it’s important to remember Australia’s fundamentals remain strong.”
The RBA lowered borrowing costs by 1.25 percentage points from November to June to help shield the economy from Europe’s debt crisis and slower growth in China. Traders are pricing in an 82 percent chance of another quarter-point reduction next month, according to swaps data compiled by Bloomberg.
“I’m not sure there’s a lot of merit in having interest rates cut as the only tool,” Chronican said. “There’s a lot of uncertainty about what the regulatory environment will be like, what the overseas environment will be like and I think getting some confidence and stability into those things is probably just as important as the level of interest rates.”
Two bailouts and the biggest debt write-off in history have so far failed to halt Greece’s slide into a fifth year of recession. The Bank of Spain said Sept. 26 the Spanish economy contracted at a “significant pace” in the third quarter. Reports showed French consumer confidence dropped for a third month in September and Italian retail sales declined in July.
While these concerns have some impact on Australia, the nation is unlikely to face the same fate as European economies, Chronican said.
Australia’s banks have A$4.7 billion ($4.8 billion) or 0.2 percent of their assets, in Greece, Ireland, Italy, Spain and Portugal, the RBA said in its semiannual financial stability review on Sept. 24.
State and federal governments have “set out programs for getting back from deficits and into surplus over some reasonable timeframe, and I think that’s a good thing,” he said. “The banks are doing their bit by reducing the reliance on offshore and wholesale funding and improving their reliance on core domestic deposits, which I think is the right thing as well.”