Bank­ing on rea­son

Townsville Bulletin - - NEWS - TERRY McCRANN

APRA has struck a rea­son­able- to- ex­cep­tional bal­ance be­tween the dif­fer­ent things that de­liver and the dif­fer­ent things Aus­tralians want out of them.

We want banks to lend us money eas­ily and at the low­est pos­si­ble in­ter­est rate. We also want them to be a safe – in­deed, a very safe “put and for­get” – place to put our money as de­posits and to get the high­est pos­si­ble in­ter­est rate.

We also – al­though many if not most of us don’t ap­pre­ci­ate this quite so keenly, be­cause it’s mostly in­di­rect through our su­per funds – want banks to earn strong and sus­tain­able prof­its.

In de­ter­min­ing that banks will have to raise more, but not that much more, cap­i­tal from their share­hold­ers – or, just keep more of fu­ture prof­its in­side the bank and not pay quite so much in fu­ture div­i­dends – APRA strikes an ef­fec­tive bal­ance be­tween all that.

The banks will only have to add around $ 8- 10 bil­lion to their cap­i­tal over the next three years.

An in­ter­est­ing com­par­i­son could be with the $ 6 bil­lion in net terms the big five will pay in the new bank tax over the next four years. And keep pay­ing that sum, and ris­ing, ev­ery four years af­ter that, for­ever. Let me make two big points. First, if our banks ever got hit by a real thump­ing cri­sis like all the other banks in Europe and the US got hit by through the GFC, this ex­tra $ 8 bil­lion and then some would go in a flash.

In­deed, even twice as much wouldn’t be enough.

That said, it’s im­por­tant for me to stress that the prospect of such an event hit­ting our banks is un­likely.

They are not like the Bar­clays, Deutches and Citi­corps of this world. Our bank vul­ner­a­bil­ity is to a 1890type col­lapse in the do­mes­tic prop­erty mar­ket.

The $ 8 bil­lion or so is to bet­ter pro­vi­sion the banks to ride through what might best be de­scribed as any “nor­mal” eco­nomic slow­down or prop­erty mar­ket cor­rec­tion.

And not just ride through in the func­tion­ing busi­ness sense, but so they can still op­er­ate more or less nor­mally in rais­ing fresh eq­uity ( and debt) as needed at that point from share­hold­ers and the mar­ket more broadly.

Bank shares rose sharply yester- day. In part this was a cor­rec­tion of the ex­cess gloom of in­vestors run­ning into the APRA an­nounce­ment. In part it was a re­sponse to the pos­i­tiv­ity of the APRA an­nounce­ment.

Both the an­nounce­ment and the ac­tual rais­ing of the ex­tra cap­i­tal when it hap­pens is not in it­self a rea­son to buy bank shares. But it should work to make bank shares a more at­trac­tive and more sta­ble in­vest­ment go­ing for­ward.

In­deed, it should do so for pre­cisely the en­tirely ap­pro­pri­ate rea­son that Trea­surer Scott Mor­ri­son was paint­ing as a no- no – any at­tempt to re­claim their lower prof­itabil­ity ( not profit) from cus­tomers.

To the ex­tent that these fu­ture stronger and safer banks should be able to raise their debt fund­ing more cheaply – that’s to say by pay­ing ei­ther de­pos­i­tors or in­ter­na­tional cap­i­tal mar­ket lenders, or both, a rel­a­tively lower in­ter­est rate, that’s en­tirely ap­pro­pri­ate.

There would be less jus­ti­fi­ca­tion for the banks to put up their lend­ing rates. But that’s also ul­ti­mately es­sen­tially a judg­ment for in­di­vid­ual bank man­age­ment on how to op­er­ate in a com­pet­i­tive mar­ket­place.

A far big­ger threat to what banks charge their bor­row­ers is Mor­ri­son him­self – and in­deed his shadow Chris Bowen. It is the prospect of Aus­tralia los­ing its Triple- A credit rat­ing.

If that were to hap­pen – and it all hangs on what hap­pens to the bud­get deficit – the banks would be au­to­mat­i­cally down­graded and they would have to pay a higher in­ter­est rate for the 40 per cent or so of their money they get in the in­ter­na­tional mar­ket­place.

The bot­tom line is that APRA’s move will make for bet­ter banks in­di­vid­u­ally and for a bet­ter oper­at­ing and safer bank­ing sys­tem.

But ul­ti­mately it can’t sub­sti­tute for good bank man­age­ment and sen­si­ble and ef­fec­tive oper­at­ing pro­ce­dures.

BAL­ANCED: Trea­surer Scott Mor­ri­son.

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