Market loses sight of big picture with Australian banks – ShareCafe


Bank stocks have taken a hit over the past week – collectively the big four are down more than 10% (a correction) on fears of rising bad debt – and so far the market seems to ignore the positive impact of higher rates on bank revenues, profits and net interest margins.

More than $50 billion has been wiped off the value of bank stocks in recent days.

Analysts and investors fear an increase in bad debt as newer homeowners suffer from rising rates and falling prices. This does not take into account repayment margins and the 21 months of homeowner and business prepayments on bank balance sheets, which left the national savings rate at around 11%.

Investors are also concerned that commercial real estate will feel the pain as well as home loans. Commercial real estate is usually one of the first sectors to be hit by conditions of high inflation, rising costs and interest rates.

And the panic selling is reminiscent of what happened in early 2020 at the height of the first wave of the pandemic, when it seemed like everything was collapsing except unemployment which was expected to soar to 10 or 15%. It did not reach 7% and quickly collapsed as millions of new jobs were taken or created and filled.

The bank run of 2020 did not happen and the billions of additional loan loss provisions were not needed and returned to bank P/L accounts in 2021 and early 2022 and used to increase profits, dividends and help fund billions of dollars in buyouts.

Many investors still don’t understand that banks these days should try to anticipate the growth of bad loans and build their provisions accordingly, rather than waiting for loans to deteriorate and starting to increase provisions for loan losses. .

That’s why the decisions made by banks like the Commonwealth and Bendigo Bank in their August reports for the year to June 30 will tell us a lot about the realism of their view on bad debts for the year. next.

Banks are more realistic about rate hikes – NAB sees two 0.50% hikes in July then August and the grim Commonwealth sees at least 0.5% in July.

But they all realize that the Reserve Bank can’t do much to control inflation – it can slow down; he can temper; but it cannot eliminate it, as it could if the problem were due to excessive domestic demand.

If he tries to bring inflation down, he risks plunging the Australian economy into a period of stagflation and then into a bitter recession.

The easiest way to curb inflation would be for Vlad Putin to withdraw from Ukraine. Obviously that won’t happen.

The main factors behind the first cycle of inflation are supply constraints – reflecting the continued impact of the pandemic, the Russian invasion of Ukraine and the Australian floods and heavy rains earlier this year.

The RBA’s rate hikes won’t boost supply, but they will start to force consumers and businesses to lower their expectations for future inflation – though that could be a divisive issue for economists and analysts , seeing that ordinary consumers quite often have inflationary expectations that are consistently higher during periods of low inflation, as we have had from 2015 to 2021.

The second round of inflation now looming is homegrown, but with strong drivers to be found in the Russian invasion of Ukraine. It’s still a supply issue, but with an overlay of strong domestic demand for oil, gas and power (it’s our winter for much of the country).

The direct drivers of these surges cannot be controlled by an increasingly worried central bank.

Seeing the RBA predict only last month that inflation will rise to 6% by the end of 2022 – a level not seen since 2000 and well above the 2-3% inflation target of the bank – no wonder the central bank and its governor are getting nervous.

“While inflation is lower than in most other advanced economies, it is higher than expected,” Governor Philip Lowe said in the statement released after the bank’s meeting on Tuesday.

“Rising electricity and gas prices and recent increases in oil prices mean that in the near term, inflation is likely to be higher than expected a month ago.

“The magnitude and timing of future interest rate increases will be guided by incoming data and the Board’s assessment of the outlook for inflation and the labor market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time…the Board will pay particular attention to these various influences on consumption when assessing the appropriate framework monetary policy.

Note that all references to wage growth have been dropped, except in some discussions of growing upward pressure on wages and inflation – in other words, wage growth is now in the minus column of the RBA Economic Checklist.

But while wage growth looks more and more will hit 3% later this year or early next year, but it will still be well below inflation, so there will still be a few more years of falling wages. real wages – which is certainly positive from the RBA checklist.


The RBA will be watching every bit of data in the coming months before deciding how big the rate hike will be at each meeting.

Many economists and analysts are forecasting half-percent rate hikes in July and August, including a 0.25% hike for September, to top the cash rate well above 2% well before Christmas. The National Australia Bank forecasts a double rise in July and August – the Commonwealth is a single double for July, then a single (0.25%) for August.

Every bit of data will be scrutinized by the RBA and its teams of economists in what looks like Alice through the looking glass – when the data is good, it will be bad (higher rates) and when it is bad, it will be good (remove the pressure on rate hikes)

The first thing this month will be the size and structure of the Fair Work Commission’s decision at the end of this month – 5.1% asked for the lowest paid workers will get it. Could the increase be split – it has done so in the past. It will be because of inflation. It’s a logical but cynical approach and will draw criticism if it happens. The Commission likes to be “liked”.

The first week of July (and every month after) sees the quadruple of major data declines – monthly home prices from Corelogic, monthly retail sales, construction approvals, housing approvals from ABS as well as industry new car sales.

Trade data can be ignored and pushed to the back of the big data queue, except for imports which will be scrutinized to see exactly where demand is growing – consumer goods, investment, oil and energy – and where it is declining. This can be a good early indicator of the evolution of domestic demand.

The RBA will want to see lower monthly house prices across the country, not just in Sydney and Melbourne; building approvals are already down 32% in the last year, so they don’t have much to go down anymore.

But the bank would like to see it continue at current levels, easing pressure on the cost of a wide range of building products – listed building products companies like Boral, CSR and Brickworks are in the firing line here.

Housing finance data shows a 0.3% decline in the year to April, with the number of loans to homeowners down 12.8%, but a 37% increase in loans to investors over the 12 months.

This is where investors worry about future bank revenues and profits, hence this week’s selloff.

The RBA’s own data on private credit (released on the last day of each month if it is a working day), as well as the ABS Lending Indicators (for credit data staff in addition to housing finance data) and monthly RBA data figures showing credit card transactions, will be closely watched to track consumer trends.

Retail sales figures each month (the first release is just before the end of the month, with the final report in the first week or so of the following month) will be vital for the RBA.

The numbers will be watched like a hawk for what, where and how much people are buying – with quarterly volume data to be watched very closely and compared to monthly sales data based on price.

RBA credit card data and survey data from major banks will also be reviewed – it is increasingly possible for the RBA to see near real-time transaction data through the new payments platform .

The CPI at the end of July, as well as the same week’s producer price data and the export and import indices will also provide valuable – but somewhat historical – data. This will serve as the basis for the national accounts two months later. The bank will pay more attention to trimmed mean and weighted median measures of underlying inflation.

Finally, remember that the RBA wants to see a lot of negatives in the data, with signs of slowing growth or declines in retail sales, housing and personal finance, car sales.

After retail sales and similar data, the RBA will closely monitor the monthly labor force data and the more granular quarterly earnings and trade data that the ABS is currently producing.

Both sets of data will be the main indicators of whether the central bank is slowing demand enough to bring inflation down, as supply constraints (hopefully) ease at home and abroad.

It would normally be ‘bad’ economic news (for Alice) that will become ‘good’ economic news for the RBA – but don’t tell the worriers in the business media and among analysts and economists.

Listed and private companies operating in the national economy had better get used to slow or no growth in revenues and especially profits from July. Shareholders had better get used to slow or no growth in dividends and to members of pension funds and others retiring next year, or else there will be little or no growth in final payments.

Like the oil shocks of the 1970s, this inflation has causes that will persist for years. There’s no easy way to fix it, but there are ways to ease the pain.


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