New normal: Life for Australia's banks after the pandemic won't be pleasant

5/05/2020 9:33:00 AM

The pandemic is already hurting the banks. Once the worst is passed, however, they still won’t like what they see.

Stephen Bartholomeusz: The pandemic is already hurting the banks. Once the worst is passed, however, they still won’t like what they see

The pandemic is already hurting the banks. Once the worst is passed, however, they still won’t like what they see.

AdvertisementThey will come out the other side of the pandemic as they went into it, in better shape than most banks elsewhere.That, and the deadweight of the non-performing loans the banks will carry well beyond the worst of the impacts of the pandemic, will impact their top and bottom lines and returns on capital.

Heading into the pandemic, the Australian banks were already experiencing the impacts of the relatively low (as opposed to ultra-low) rate environment and the impacts on their balance sheets of ever more stringent capital and liquidity requirements to meet the "unquestionably strong" test established by the financial system inquiry.

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What an excellent well written article on loss of status of American economy, US dollar etc. and they still have the fattest profit margins of any banking system in the developed world despite current mkt They’ve got 20 years of monopoly profits to draw on. I think they’ll be ok! Wish I could actually care - just can’t. They are evil.

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Play video The initial impacts of COVID-19 on the banks have been substantial but manageable, even though it has cost ANZ and Westpac shareholders their dividends and seen NAB shareholders' payout slashed even as the bank asked them to contribute to a $3.Victoria records 22 new COVID-19 cases 04/05/2020 | 7min Victoria has experienced its largest jump in COVID-19 cases in two weeks with 22 people testing positive to the disease from 13,000 tests.Michigan governor slams racist protestors who stormed State Capitol; Italy coronavirus deaths hit March 10 low Chinese defence expert Adam Ni, from Sydney's Macquarie University, told nine.Australia's migration intake to fall 85 per cent due to coronavirus, Scott Morrison says   Last year, Prime Minister Scott Morrison announced he would be capping permanent migration numbers at 160,000 per year, down from 190,000 in a"congestion-busting" move, but at the same time, temporary migration hit historically high levels.

5 billion capital raising. Between them the three majors to have reported their March half results have, so far, provided more than $3 billion in coronavirus-related provisioning for future loan losses. Premier Daniel Andrews thanked the 13,000 Victorians who came forward for testing on Sunday. It’s almost inevitable that number will swell once the banks have to come to more definitive conclusions about the fate of specific customers. "China is making clear progress in acquiring an effective strategic bomber that would enhance its strategic deterrence against its competitors, such as the US," he said at the time. Advertisement Nevertheless, the majors went into this crisis with very conservative balance sheets, awash with capital and liquidity and supported by a $90 billion, three-year term funding facility from the Reserve Bank with a 25 basis point interest cost. Favourite. Loading They will come out the other side of the pandemic as they went into it, in better shape than most banks elsewhere.  Associate Professor  Boucher said the skills and expertise migrants bring to the workforce were essential, while also noting many aspects of Australia’s migration program, particularly the permanent migration areas, such as skilled workers, family reunions or New Zealand migration would be difficult to scale back.

That doesn’t mean, however, that they will be in great shape. China is expected to continue with an increase in its defence budget despite the pandemic impact to its economy. The recovery from this episode is going to be lengthy, slow and uneven. There isn’t going to be a great surge back to pre-pandemic growth levels for an economy that was experiencing only modest growth levels ahead of the outbreak of the virus. That, and the deadweight of the non-performing loans the banks will carry well beyond the worst of the impacts of the pandemic, will impact their top and bottom lines and returns on capital.18 trillion yuan (A$275 billion), up 7. Given the condition of the rest of the world, the global economy is also likely to experience meagre growth and the key central banks appear set to maintain ultra-low policy rates and unprecedented monetary policy support for their economies for years, if not decades. This is a chance to think about if that’s the right strategy going forward,” he said.

As European banks have discovered in the past decade, those settings are cancerous for banks. They erode their margins and profitability and leave them with returns on equity that are below their cost of capital, preventing them from accessing equity markets. "In the current environment, Beijing is keen to emphasise that China has recovered substantially from Covid-19 and that its power trajectory is unaffected by recent events," he said. Heading into the pandemic, the Australian banks were already experiencing the impacts of the relatively low (as opposed to ultra-low) rate environment and the impacts on their balance sheets of ever more stringent capital and liquidity requirements to meet the "unquestionably strong" test established by the financial system inquiry. Their returns on equity (ROEs) - in the high-teens or, in Commonwealth’s case, above 20 per cent before the 2008 crisis - had fallen steadily into the low teens in recent years. Last year they averaged about 12 per cent. Associate professor of human geography Alan Gamlen from Monash University said migration levels would need to stabilise at around the same rate as pre-coronavirus in order for Australia to return to the same level of economic growth.

In the latest half, weighed down by the coronavirus provisioning and, in Westpac’s case, a massive provision for its likely AUSTRAC fine, the majors produced an average return on equity of only 6.4 per cent. That’s the first time in living memory that the major banks have had ROEs in the single digits and would be well below their costs of capital of closer to 10 per cent. Navigating the pandemic ..

. will be challenging enough without having to also consider how to best position themselves for life after Their net interest margins, which slipped below two per cent for the first time last year, averaged three basis points lower at 193 basis points. Given the likelihood that the negative to zero central bank rates in the US and Europe are likely to be a semi-permanent feature of the post-pandemic landscape, the outlook for margins – the core driver, with volumes, of the banks’ profitability isn’t positive. Banks make their money from maturity transformation, borrowing short and lending long and relying on a positive yield curve to pocket the difference in interest rates. Yield curves around the world (including Australia’s) are, however, very low and flat and in some economies negative.

Skinnier margins are unlikely to be offset by volume growth. The damage done to households and businesses, particularly to small businesses, and to confidence more broadly, is likely to have a dampening effect on demand for credit for some years. There will almost certainly be significantly reduced demand and therefore fierce competition for the demand that is there, ensuring margins and returns remain low. Even before the pandemic hit, Australia's banks were already experiencing the impacts of the relatively low (as opposed to ultra-low) rate environment. Credit: Louie Douvis With the approval of their regulator, the banks will run down their capital levels in their responses to the pandemic.

Once the worst has passed, however, it is inevitable the Australian Prudential Regulation Authority will insist they restore their capital adequacy to unquestionably strong status. Lower margins, depressed demand and more capital means reduced profitability, less generation of organic capital and lower ROEs. It also means access to capital markets for new equity will be less certain – raising capital when ROEs are below the cost of capital destroys shareholder value. In Europe in the post-financial crisis environment, many of the bloc’s banks were essentially zombies, rendered unable to deal with some of their legacies from poor credit disciplines before and during the crisis by their inability to generate or raise new capital. Loading The starting point for our banks was much stronger than almost any other system in the world.

It is unlikely they will find themselves in that predicament but they will be forced to adapt to the challenges of the post-pandemic environment. They’ll have to structurally and radically reduce their cost bases to operate in a low-margin, low-growth environment. First, of course, they need to get to that point. Navigating the pandemic and the likely post-pandemic conditions without reference points to guide them will be challenging enough without having to also consider how to best position themselves for life after the pandemic. Sign up to our Coronavirus Update newsletter Get our Coronavirus Update newsletter for the day's crucial developments at a glance, the numbers you need to know and what our readers are saying.

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