RBA rises to test bank lending skills

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With the RBA rate hike coming during a federal election campaign and bank earnings reporting season, banks have no leeway to raise rates higher than the central bank’s change in rate. official exchange.

Banks keep cashing in

The profit-generating power of banks will be on full display over the next six days as ANZ, National Australia Bank, Macquarie Group and Westpac report combined cash profits of around $12.5 billion.

ANZ, NAB and Westpac release half-year results, while Macquarie releases record full-year figures. Analysts expect net interest margins to continue to come under downward pressure from competition and weak revenue growth.

As markets signal that official interest rates will rise to 2.75% by December and 3% by June next year, it is clear that there will be losers, and the most obvious are overwhelmed borrowers and banks with a loose credit check.

There will be second-order negative effects even under the less aggressive forecasts of market economists, which suggest that the RBA’s cash rate will be around 1.35% by the end of the year and will peak at around 2.25% next year.

Tuesday’s equity market reaction indicated where the impact will be felt the most, with real estate investment trusts selling down around 3% on a day when the market was down 0.4%.

Disciplined Borrowers Advance on Loans

Banking stocks should do well, according to rating agency Standard & Poor’s, which argues that banks are likely to revalue their assets before a commensurate increase in borrowing costs.

He said loan losses were likely to rise as more indebted households struggled to service their debt at higher interest rates.

S&P concluded, however, that defaults would be limited because banks had been disciplined in assessing the debt service of borrowers at interest rates that included a 3% service buffer.

The rating agency said the additional gross income earned by banks would more than offset losses from credit defaults.

Reserve Bank of Australia Governor Philip Lowe was keen to play down the impact of the rate hike, pointing to higher official cash rates as a sign of a resilient economy.

Additionally, he said households had accumulated about $240 billion in savings during the COVID-19 pandemic and on average borrowers were ahead of their mortgage payments by about two years.

He didn’t say so explicitly, but Lowe’s comment pointed to the dangers of believing that rising interest rates would lead to doomsday scenarios of falling house prices, rising defaults and seizures by banks of people with loans equivalent to six times their income.

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