The big four Aussie banks have posted a $29 billion profit, a 10% increase over last year, with more to come as interest rates rise, reports Callum Foote.
It was a massive week for Australia’s banks. With Westpac’s profit result posted on Wednesday morning, the picture of the big four banks’ dazzling profitability is complete. Money-printing from Covid stimulus, as well as rising interest rates, are helping massively too.
Together, the big four have posted record profits, totalling $29 billion for the year ending September 2022.
Commonwealth Bank makes up a third at $10 billion. ANZ and NAB posted $7 billion each with Westpac recording a $6 billion profit.
This represents a 10% increase in profit from last year, with only a corresponding 5% increase in the corporate tax expenses of the banks.
The banking giants do, however, contribute significantly to the government’s tax revenue, together posting $12.5 billion in corporate income tax expense for 2022.
This comes as last month’s federal Budget forecasted that inflation is expected to peak at 5.75% for this year and will drop to 3.5% for 2023-24, both numbers higher than the July economic update and above the RBA’s target of 2 to 3 per cent.
The December quarter this year is forecast to see inflation as high as 7.75%.
High energy prices and the floods have been blamed for keeping higher inflation more persistent, say analysts.
Part of the reason the banks are experiencing billions in increased profit from last year is that they are not increasing their interest rates on savings and deposits as quickly as they are pushing up mortgage lending rates for borrowers. Hence a wider net interest margin.
“In a rising interest rate environment, deposit rates are going up at a slower rate than mortgage rates,” AMP economist Shane Oliver said.
“That’s not necessarily going to last; there’s a bit of a lag there at the moment. The risk is that the banks will slow down like other parts of the economy as interest rates rise, especially if economic activity declines, unemployment rises, or we go into recession.”
If rising interest rates are pushing up bank profits then expect the big four to rake it in over next year as well.
Andrew Boak, Goldman Sachs’ Australian chief economist, forecast that the RBA will lift the official cash rate five times over the next six months to 4.10% in 2023.
“We do not expect the RBA will risk falling too far behind a synchronised global tightening cycle”, Boak said.
“All considered, we now expect plus 25 basis point rate hikes each month to May 2023 (inclusive) – to a terminal rate of 4.1% (prior: 3.6%) – followed by 110 basis points of easing over 2024 to 3%”.
This also increases the interest paid on the $420 billion which the banks have deposited with the Reserve Bank in Exchange Settlement Accounts following the enormous money printing (QE) which the RBA undertook to stimulate Australia’s economy during Covid.
Squeeze on mortgages
New analysis from Finder shows that typical homebuyer budgets have been slashed by 22% following the RBA’s cumulative 2.75% of monetary tightening, equating to $214,000 less buying power for the typical family.
Finder also estimates that if the OCR was to rise to 3.85%, as forecast by Westpac, then buying power would fall by 29% (-$284,100) for the same representative household.
If Boak’s forecast is correct then It would also mean that Australia’s average discount mortgage rate will have more than doubled from 3.45% in April 2022 to 7.45% in May 2023, taking it to its highest level since October 2008
RateCity.com.au research director, Sally Tindall, explained that “the average family earning $150,000 a year will have seen the maximum amount they can borrow from the bank shrink by around $214,600 across the last seven hikes”.
In turn, “ABS data shows the value of new lending has dropped to its lowest value in almost two years – a trend that’s likely to continue as both sellers and buyers put their plans on ice”.
The above analysis explains why Australian house prices will continue to fall as the RBA hikes rates. They also won’t recover until the RBA changes track and begins the next rate cutting cycle, which will increase borrowing capacity and homebuyer budgets.
Callum Foote was a reporter for Michael West Media for four years.