Reviews: RBA Ticks Financial System Health, But Warns Banks, Again

The Reserve Bank has given the Australian financial system and banks a tick of good health in its first Stability Review of 2012.

But the central bank has again cautioned banks and their investors not to expect rampant profit growth in the next year or so.

The Bank repeated a comment first carried in last week's minutes of the March 6 board meeting, when it said:

"..the Australian banks had continued to record robust profits, although the slow credit growth environment was likely to constrain the pace of future profit growth."

Yesterday it expanded on that saying in the first Stability Review of 2012 "the slow credit growth environment could constrain the pace of their future profit growth.

"It would therefore be unhelpful if banks were to chase unrealistic profit expectations by taking on more risk - through lowering credit standards or expanding too quickly into new or unfamiliar markets - or by pursuing cost cutting in a way that weakens their risk management capabilities."

It was a warning also made at least twice by senior regulators in February: one was from the head of the lead regulator, Dr John Laker at Senate Estimates, and second was from the RBA's head of financial stability, Luci Ellis in a separate speech in Sydney.

Apart from that comment, the RBA was positive about the banks, saying they remained in good shape, and are less susceptible to global weakness.

And the central bank said the big banks are also continuing to record strong profits, thanks to a solid control over their costs.

(But not the Bank of Queensland which surprised with a big rise in impairment charges and a first half loss of $91 million).

"The larger banks are in a better position than a few years ago to cope with the tighter funding conditions given the improvements they have made to their funding, liquidity and capital positions over recent years," it said.

"Banks' non-performing asset levels have come down a little recently, but remain higher than they were a few years ago, particularly for business loans."

"The commercial property market, traditionally a source of vulnerability for banks, has continued to improve after the recent downturn, although construction activity is still muted and financing activity weak," The RBA noted.

The bank said that the global financial market environment is on a more stable footing and Australian banks are in a good position to address any future turmoil.

"Global market sentiment has improved noticeably since late December," the RBA said.

"To a large extent, this reflected the European Central Bank's three-year lending operations, which have greatly reduced funding risks for European banks."

The RBA said these operations had provided much needed support for euro area banks in their funding and liquidity, although risks still remained.

"Even though conditions in financial markets have improved, the ongoing difficulties in Europe as well as the subdued outlook for global growth will continue to pose risks to global financial stability in the period ahead," it said.

It also warned that countries outside the euro zone were still susceptible to these risks.

Spending and saving habits for Australian households remained cautious, meaning greater resilience to external factors, the RBA said.

"The household saving rate remains well above the levels recorded in the 1990s and early to mid 2000s," it said.

"Many households are choosing to repay their debt more quickly than quickly than required."

That includes home mortgages, where more than 50% of owner occupiers are ahead on their repayments, according to the latest data, the RBA said.

The Australian business sector was also performing solidly, as well as the commercial property sector, which had continued to improve since the downturn, the RBA said.

The RBA said the mining boom, which is directly affecting around 20% of the economy, is the new challenge for banks, bringing with it a strong Australian dollar.

As a result the gulf between booming mining states like Western Australia and the more populous regions in the east is widening.

"Conditions continue to vary significantly across the business sector," the RBA said.

"These divergent experiences help explain why banks' non-performing business loans and business failure rates are somewhat higher than average," it said.

"Conditions continue to vary significantly across the business sector: the mining and related sectors are benefiting from the resources boom, while the retail, manufacturing, construction and tourism sectors are facing headwinds from subdued retail spending and the high exchange rate.

"These divergent experiences help explain why banks' non-performing business loans and business failure rates are somewhat higher than average.

"Overall, though, the business sector is in a better financial position than it was several years ago, having delevered considerably and improved its liquidity position.

"Though business credit has picked up a little recently, overall demand for external funding remains subdued."

"While arrears rates on mortgages are still above average, they have eased a little recently, and remain low by international standards. The arrears rate for housing loans (on banks' domestic books plus securitised housing loans) declined to 0.6 per cent in December, from 0.7 per cent in mid 2011.

"The non-performing rate for credit cards has also improved, falling from 1.4 per cent in June 2011 to 1.2 per cent in December, while the rate for other personal loans has been broadly unchanged since mid 2011 at around 2 per cent.

"While the aggregate mortgage arrears rate has come down recently, state-level rates have diverged somewhat.

"Securitisation data suggest that arrears rates on housing loans in Queensland and Western Australia have increased the most over the past few years.

"Many of the loans in arrears were originated between 2006 and 2008, towards the end of the period of rapid housing price growth in those states, which was followed by falls in prices.

"By contrast, arrears rates have declined from the recent peaks in New South Wales and Victoria. As a result, Queensland - particularly the areas in the south-eastern part of the state that rely on tourism, such as the Gold Coast and Sunshine Coast, and where unemployment is higher than the state average - is now more heavily represented among the regions in Australia with the highest mortgage arrears rates; a few years ago, New South Wales was more heavily represented," The RBA wrote.