The Impact from Slowing the Lending Machines

The Impact from Slowing the Lending Machines

Bank profits are back in the news.

This time we aren’t chanting ‘greedy banks’.

If anything, it turns out the good times may be over for the Big Four.

All four pillars saw their profits fall for the 2019 financial year.

Westpac’s profits are down 16%.

NAB dropped 13%.

CBA dropped 8%.

ANZ is down 7%.

Three out of four cut their dividend for the year.

Does this mean the good times are over for the Aussie banks?

Money-backed guarantee

Aussies find themselves in an unusual situation right now.

For the past decade, we’ve called the banks names. Guffawed at their multibillion-dollar profits each year…

That was until last year…when the profits fell a smidge.

However this year, profits between the Big Four have collectively fallen 7.8% compared to 2018.

Don’t start crying for them yet though. The Big Four still raked in a combined $29.6 billion for 2019.1

The point is, we aren’t used to our banks’ profits shrinking.

See, after the financial crisis, Aussies banks were the envy of the world…

They sailed through the financial crisis.

There were no bank runs or public bailouts — like some of their Northern hemisphere counterparts.

In fact post financial crisis, life got even better for the Aussie banks.

That was largely down to four things.

A run on the bank was prevented, because the Rudd-era government introduced bank guarantees on all deposits up to $250,000…

China fired up the money machine and started buying our commodities in unprecedented quantities…

Lending criteria for homes loans went from a ‘stringent criteria’ to ‘has a heart beat and wants to buy bricks’…

Oh, and thanks to the royal commission, we know they profited handsomely by completely disregarding their fiduciary duty to us, and sold us any product that could make them a buck.2

In fact, in 2016 the Sydney Morning Herald joked that Aussie banks were sending US hedge funds broke.

International traders were watching our property boom from the sidelines, and kept betting against the banks that our property boom would end.3

By mid-2016, global banks gave up trying to bet that our banks would crash.

Our banks stayed profitable because of rampant home lending, China’s buying, and selling bank services to people no one needed…

Yet come 2019, it seems ever-increasing bank profits have hit the skids.

Misinformation support banking myths

Are the good times over?

Over at the Australian Financial Review, they wrote, that things aren’t that bad. That smart investors would be able to see through the temporary profit fall, writing:

But for all the hand wringing by bank bosses, keen-eyed investors realise that the situation could be much worse. The combination of a strong jobs market and ultra-low interest rates means that the big banks continue to benefit from extremely low levels of problem loans.’4

That entire statement is problematic.

Because in one swoop, it demonstrates just how disconnected the ‘official’ figures are from reality.

The jobs market isn’t strong. Last year, the majority of the new jobs ‘created’ were actually government roles. This information is telling. Informing us that the private sector isn’t hiring.

Plus the October jobs survey from ANZ shows that new job listings fell in October.5

To boot, the Australian Bureau of Statistics has the official unemployment rate at 5.2%…where as Roy Morgan reckon it’s much closer to 10%.

Not only that, ultra-low rates aren’t spurring consumption — which is part of their purpose.

Retail data released last week for September, showed that spending increased by 0.2%. And of that quarterly volumes — which is how much we are buying, not the value — was -0.1%.

While retail data is generally delayed data, it’s worth remembering that the September data has two tax cuts factored in.

Meaning even after all that, we still barely spent anything…

The point is, official employment data and low rates aren’t matching up with how consumption is moving through the economy.

If employment were as high as the ABS wanted us to believe — if we were working as many hours as we wanted and were making more money because of tight labour conditions — then that would be reflected in retail statistics.

So, smart investors wouldn’t know that bank profits had fallen because sudden margins became tight.

Falling bank profits have come because of the reduction of home lending over the past two years, and not being able to flog any old product onto customers in a bid to turn a buck.

And that’s what we are seeing in the reduction of bank profits.

Summing up bank profits falling because of strong jobs and low rates is false, and unintentionally misleading.

Oh, and as for ‘extremely low levels of problem loans’, I didn’t miss that.

We’ll tackle that tomorrow.

Join me then.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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