Banks: RBA Cool On Bank Funding

A senior Reserve Bank official has once again reminded us that Australian banks are not the vulnerable things that some recent comments have suggested.

From that downgrade by Moody's last week, to strange comments from the ANZ's CEO Mike Smith about funding costs rising, to Goldman Sachs downgrading its outlook for our banks and cutting their views on several of them, the Big Four banks, ANZ, NAB, CBA and Westpac have all seen their share price tumble.

It's been a big part of the 7% fall in local shares this month and part of the Wall Of Worries that the AMP's Dr Shane Oliver refers to in a feature today below.

Back on March 15 Reserve Bank Assistant Governor Guy Debelle produced a solid argument that our banks face a tough few years ahead because deposit growth looks like outstripping the growth in lending.

He said this would constrain returns and was a result of the sharp rise in savings by Australian households and businesses.

That forced bank analysts to redo their outlooks for the banks, but when the quartet released solid interim profits (or updates in the case of the CBA); investors started pricing in stronger earnings.

Then the Moody's downgrade hit (which did nothing but frighten a host of investors), the eurozone crisis re-entered the headlines, hedge funds and others started shorting bank shares and telling brokers they were doing it and fears grew about weak growth, inflation, rate rises and their impact and just about anything else.

So what does the Reserve Bank think?

Co-incidentally, Deputy Governor Ric Battellino spoke to a bunch of brokers at a Sydney conference and the theme of his speech was to back and elaborate on the themes made in Mr Debelle's speech back in March.

In fact a key part of the speech was explaining to brokers and anyone reading his speech why Moody's was wrong in cutting the ratings of our banks for the reason: fears that their supposed high dependence on offshore borrowing, could leave them exposed in another financial crisis.

In fact, without mentioning Moody's Mr Battellino made a direct rebuttal of part of the ratings agency argument that Australian banks could be hurt by another crisis.

"Some people claim that the global financial crisis was a vindication of the view that offshore borrowing causes problems.

"But this misses the point that all banks were affected by the crisis, irrespective of whether they were borrowers or lenders in international markets.

"In fact, the Australian banks, which many see as being among the largest users of offshore wholesale markets, emerged from the crisis in better shape than most.

"While they benefited from a temporary government guarantee, so too did banks in most other countries.''

He told the conference that the banks can expect strengthening credit growth over the next year, but it would be unlikely that they would be forced to boost off shore borrowings to meet this growth.

Mr Battellino said the current period of weak credit growth is likely to be relatively short-lived in a growing economy.

"It would be reasonable to assume that the rate of growth in credit will remain somewhere in the single-digit range," he said.

"That rate of credit growth should be able to be matched by deposit growth, reducing the need to raise funds in wholesale markets."

It is unlikely that banks' funding patterns will return to those seen before the 2008 financial crisis, which saw a heavy reliance on offshore markets, Mr Battellino said.

"Changes to supervisory rules and market conditions have made pre-crisis funding patterns less attractive," he told the conference.

"In the economic climate likely to be faced by banks over the next few years - solid economic growth but with cautious behaviour by households and relatively low inflation - it would be reasonable to assume that the rate of growth in credit will remain somewhere in the single-digit range.

"That rate of credit growth should be able to be matched by deposit growth, reducing the need to raise funds in wholesale markets.

"In the current environment, it is unlikely that households will have much enthusiasm for increasing indebtedness.

"The most likely scenario is that household borrowing will continue to grow at a relatively subdued rate for some time yet.

"From the Reserve Bank's perspective, this would be a welcome development.

"It would allow the period of consolidation in household balance sheets to continue and would avoid households adding to pressures in the economy at a time when its productive capacity is already being stretched by the resources boom.

"In addition, if household saving continues at its recent higher level, it will sustain deposit growth.

"The household saving rate could even increase further. It is still below its historical highs and strong employment and income growth could provide the wherewithal for higher saving to co-exist with steady consumption growth.

"Also relevant will be trends in non-bank capital inflows.

"If the current diversified pattern of capital inflow continues, this too will add to deposit growth as these inflows find their way into bank deposits.

"All in all, it is likely that banks will be able to maintain the more conservative funding pattern they have put in place recently."