‘Australia is in a very strong position’: Bank chiefs have a spring in their step

Yet when it comes to the economy, bank bosses are betting Australia can pull off the delicate balancing act of driving unemployment down to historic lows, while lifting interest rates from record lows of near zero.

Comyn’s rival at Westpac, Peter King, also struck a more upbeat tone when addressing a business forum this week, highlighting the low levels of financial stress in its vast portfolio of business loans, mortgages and credit cards.

‘I’d like to think the next two years are going to be markedly different and better than the last two.’

Matt Comyn, CBA chief executive

King acknowledged some businesses such as CBD operators had been hard by Omicron, but overall, he suggested the extensive government support for businesses in the past two years had done its job.

“If we look at how people are going, the stressed ratio for our business portfolio is back below where we started with COVID,” he said.

The banks’ views are broadly similar to those of the Reserve Bank, which says 2022 is shaping up as a year of strong recovery, with a jobs boom and a long-awaited return to better wage growth. The difference is that while the RBA boffins largely focus on economic statistics, commercial banks are seeing green shoots appear through their millions of customer accounts.

A standout trend is the sheer amount of cash the banks can see sloshing around in customers’ accounts. Comyn said there would be a “pretty substantial tailwind” as households started dipping into $250 billion in excess savings in their bank accounts. King also noted the bank’s deposit to loan ratio was “well up” at around 83 to 84 per cent

“That just shows you how people have built their buffers during the last little while,” King said.

The number of borrowers struggling to repay their loans is also very low. CBA’s provisions for bad loans this week fell by almost $1 billion compared with last year, with a similar pattern seen across the sector.

Housing credit is still growing briskly, while business loan growth is the strongest since the global financial crisis. CBA economists also say the bank’s internal data based on salaries paid into customer bank accounts points to an acceleration in wage growth.

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Banks are also taking heart as COVID-19 restrictions on international travel are wound back, allowing businesses to return to something closer to normal.

King this week hailed the return of tourists and other visa-holders from February 21 as “vitally important,” both as a source of customers for many businesses, and to deal with labour shortages. Comyn, who hasn’t left the country since the pandemic started, is now planning to meet offshore shareholders and lenders through an investor roadshow in April.

There are also signs of hope for the hard-hit CBDs as next month shapes up as a time when more workers will start coming back to city offices, providing relief to struggling cafés, restaurants and retailers.

Westpac, CBA and Suncorp are working towards having more staff back in the office on a hybrid basis in March, while National Australia Bank is eyeing off a return to city offices from late February. Its chief Ross McEwan has been a strong advocate for a return to the office. “We need to get these cities moving again,” NAB’s CEO said earlier this month. ANZ is waiting on government health advice.

Key risks

Despite these positive signs, there are plenty of risks that could still derail the bankers’ upbeat forecasts.

When asked about the key risks to the recovery, Comyn nominates the possibilities of new variants and geopolitical tensions but says the bank will “remain well-prepared for a wide range of economic scenarios, and that’s reflected in our provisioning and capital levels, but it’s not our base case”.

Suncorp chief executive Steve Johnston says banks will always be sensitive to any rise in unemployment – though does not see any evidence of that – while climate change and more frequent disasters are an ever present risk to its insurance business. “It’s not without risk – it will be volatile – but my general disposition is positive,” Johnston says.

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Inflation – which has hit an annual pace of 3.5 per cent in Australia and surged to 7.5 per cent a year in the US this week – is also getting close attention. An inflation outbreak could change the picture quickly if domestic price rises take off. “For an insurance company, inflation is probably the number one risk,” Johnston says. Yet so far, he isn’t seeing evidence of a material outbreak in inflationary pressure.

Perhaps the biggest longer-term issue will be what happens to interest rates – which have crunched bank profit margins in the $1.9 trillion mortgage market, by unleashing a flurry of refinancing and aggressive competition.

This collapse in net interest margins has been the obvious weak spot in all bank results of late. Yet on this issue, investors are also hopeful there is a light at the end of the tunnel.

Markets are convinced the RBA will need to hike official interest rates this year, with CBA’s chief financial officer Alan Docherty this week saying the lender’s medium-term margin outlook could improve due to a “historically unique inflection point” in interest rates. CBA this week said that for every standard RBA rate hike, its margin would lift by about 4 basis points.

Bank bosses are therefore far from impartial observers when commentating on what the RBA should do with interest rates: they have plenty to gain from rising borrowing costs.

Macquarie Group chief executive Shemara Wikramanayake also told a market briefing, in which she unveiled a record quarter, that rising rates should help across asset management, investment banking, and retail banking. “In the early stages of rates increasing, especially if it’s driven by increasing growth, it should be positive for the business,” Wikramanayake said.

Rising rates would, of course, bring their own challenges for banks: namely slower credit growth and the risk of more customers falling behind on repayments.

But given the better economic backdrop, customers’ large savings buffers, and the extremely low level of rates today, banks are confident their portfolios can withstand higher rates without much of an increase in hardship.

Just when those rate rises occur, however, will be up to RBA governor Philip Lowe. On Friday, Lowe repeated that he was prepared to be patient before hiking rates, and how soon it acted would ultimately depend on how strongly the economy bounced back.

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