While global leaders (we use the term very loosely) gather in the trendy French town of Cannes to ruminate on the myriad problems caused by too much debt, Aussie banks are still reaping the benefits of an increasing Australian debt.
Over the past week or so, NAB, Westpac and ANZ have all reported record annual earnings. The Commonwealth Bank, with a June 30 reporting date, delivered a $6.8 billion cash profit a few months ago.
How do the banks continue to make such healthy profits in the face of the weakening economy? Aren’t households saving income at the highest rate in decades and paying down debt?
Well, you would be forgiven for thinking this way. But a quick glance at the balance sheets of the big four banks (and data from the Reserve Bank) suggests anything but.
The process of deleveraging Australian debt has not even started yet.
According to statistics from the RBA, in the year to September 2011, seasonally adjusted total credit outstanding (which is a measure of total debt in the economy) was $2.03 trillion. At the end of June, Australia’s economic output was $1.31 trillion, putting the total debt-to-GDP ratio at around 155 per cent.
A year ago, total debt outstanding was $1.97 trillion. And the year before that, $1.92 trillion. No evidence of deleveraging there.
And if you look at the big banks, they are continuing to grow their assets. Banks’ assets are equal to the debts of households and businesses. So if their assets are growing, so too is debt. Banks make a profit margin on every dollar of asset growth they enjoy, so higher assets mean higher profits.
In the year to June 30, the Commonwealth Bank’s assets grew 3.3 per cent to $668 billion. The other banks that rule off the books at the end of September also expanded. Westpac grew assets 3.4 per cent to $628 billion.
The ‘smaller’ two of the big four – NAB and ANZ – appear to be sacrificing profitability for growth. They expanded their asset base by a sizable 10 per cent and 12 per cent respectively.
On average, the big four grew assets faster than the overall market. This indicates the majors continue to grow at the expense of smaller competitors. The concentration of financial power in Australia is ongoing.
What about Australian housing debt? In aggregate, that’s not being paid off either. In the two years to 30 September, owner-occupier housing debt has increased from $740 billion to $846 billion. Investor housing debt has increased from $316 billion to $360 billion.
So if you’ve been thinking that Australia’s high savings ratio, which hit 10.5 per cent in the June quarter, is going towards paying down debt, you’d be wrong. In fact Australia has been doing the opposite. Australian debt levels continue to grow.
The savings rate may be a little misleading too. According to the Australian Bureau of Statistics:
Household saving is not measured directly. It is calculated as a residual item by deducting Household final consumption expenditure from Household net disposable income. As the difference between the two aggregates is relatively small, caution should be exercised in interpreting the Household saving ratio in recent years, because major components of household income and expenditure may be subject to significant revisions.
Anyway, the point we’re making here is that Australia’s period of deleveraging, unlike the rest of the Western world, has not yet begun
That could change soon though. China’s economy and demand for raw materials is beginning to slow noticeably. Steel inventories are building. Those with a penchant for wishful thinking are not worried. They believe the central planners will be able to ‘finetune’ the economy and prevent a hard landing.
They ignore all lessons of history. They even ignore an event that has hardly passed into the history books – the US sub-prime crisis. Once a credit bubble pops, it’s all but impossible to reinflate.
The China slowdown will hit Australia’s terms of trade and national income. The RBA can offset this to some extent through interest rate cuts. But it may be the catalyst that forces Australia to join the rest of the developed world in the process of deleveraging.
In the meantime, expect uncertainty and more volatility. As Murray Dawes says in his just released YouTube Stock Market Update, ‘everything is now set up perfectly to see the markets fall over in the near future’.
Here we go again.
for The Daily Reckoning Australia