RBA says that banks directly account for half of the total assets of the financial systemin present times in Australia. Moreover, the banks have diversified and ventured into funds management,as well as insurance services and play a central role in the Australian financial system.
The Australian economy is currently a host to 53 banks, out of which 14 are primarily Australian owned banks and are listed on the Australian Stock Exchange. Also, none of these banks is owned by the Australian governmentbutthe Australian Prudential Regulation Authority (APRA) supervisesall of them.
Some of the Australian banks with nation-wide presence and offering a wide array of financial services are ANZ Banking Group (ASX:ANZ), Commonwealth Bank of Australia (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) and account for a significant portion of total assets of the Australian banking system.
Other major banks constituting the Australian financial system are Bank of Queensland Limited, Macquarie Bank Limited, Bendigo And Adelaide Bank Limited.
Amidst the spread of the coronavirus, the financial institutions were placed under a different pressure of ensuring ample liquidity and flow of funds in the economy. Australian central bank, RBA has already announced several financial measures to tackle theimpact of the covid-19.
Impact of Coronavirus onthe Australian Banking Sector
The biggest plunge was seen in the10-year US bond that had plunged to a new all-time low of 0.318%, intraday on 9 March 2020, and Aussie 10-year bonds that had fallen beyond 0.60%.
Also, the current times of struggle have compelled the central banking authorities to lower their interest rates that have now inched closer to zero with RBA slashing the interest rate to 0.5%.The lower interest rates add to the misery of the banks asthis further lowers the margins that banks could secure from housing loans and banking accounts.
These earnings from housing loans and banking accounts constitute for the profit of the sector. Higher the interest rates, higher the profit earnings for the banks, and lower the interest rates, lower the profits for the banks.
The struggle does not end here for the banks as there are predictions for further reductions in the interest rates. The key banking corporations in the Australian financial sector have challenges awaiting on the road ahead.
The coronavirus impact was also visible on the equity markets, where the banking stocks lost huge sum of moneyamidst the global sell-off from the investors.
However, world-renownedrating agency, S&P Global Ratings believes that the Australian banks have thepotential to contain the rise in credit losses and disruption to funding markets that are sproutingdue to coronavirus outbreak.
Moreover, anticipations are also being made for the rebound of the economic growth in the year 2021 after slowing down in the current year 2020. There is a continuous uncertainty mounting in the market concerning the liquidity and availability of liquid assets in the market.
Let us look at the major Australian banks and their financial soundness in times of covid-19 crisis.
With a view to assist in the revival from the current COVID-19 crisis,the ANZ Banking Group (ASX:ANZ)declared an unprecedented support package for small business and home loan customers. The package carries the potential of infusing$6 billion into the Australian economy and includes:
- A reduction of some fixed rates of 0.80%p.a. on new loans for small business
- A decline of some fixed rates 0.49%p.a. for home loan customers
- A reduction of 0.25% p.a. for variable small business rates
- A decline of 0.15% p.a.variable home loan rates
The bank believes that the highly competitive fixedrates being presentedshall offer certainty over repayments with its lowest fixed rates on recordto the customers.
In a similar attempt, the Commonwealth Bank of Australia (ASX:CBA)has also extended its support for small businesses and households through numerous measureslike:
- A cutof 100 bps interest rate for all existing cash-linked small business loans
- A decline of 70 bps interest rate in one, two- and three-year fixed home loan rates for owner-occupiers paying principal and interest to 2.29% p.a.
- Increase of 60 bps in 12-month term deposits to 1.70% p.a.
- Alterations to home loan repayments which shall release up to $3.6 billion in cash for Australian households
These measures from the bank reflect uponits strong supportof the RBA’s new term funding facilityand fully looks forward to participating in this scheme to the best possible extent.
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Similarly, the National Australia Bank Limited (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) also announced interest rate cuts and financial support for businesses and homeowners impacted by COVID-19.
These support packages come at a time when business customers, as well as individual customers,are facing increased financial difficulty. Australian banks have shown a strong intent towards supporting the RBA’s decision.
The Australian banks stand on balance sheets with a fair level of liquid assets, have access to the RBA’s Committed Liquidity Facility, haveaspace for accommodating and facility to issue covered bonds to supplement their funding, and a significant part of the banks’ offshore borrowings remaining short term.
Theimpact of the coronavirus pandemic is expected to stay for quite some time, and this time is going to be a test for the Australian banks. The escalating uncertaintieslay increased pressure on banks to maintain not only theirstrong fundamentals but also support other businesses as well as individuals in Australia.
The Council of Financial Regulators (CFR) believes that there is an urgent need for stabilising and increasing theresilienceof the financial system, as well as, the opening of the markets and orderly performance of the same.
The RBA has also decided on a comprehensive package to assist in jobs, incomes and businesses as the Australian economy is undergoingextraordinary and challenging times amidst coronaviruspandemic. The Australian banking constituents,along with the Government and other authorities,have shownextensive cooperationto tackle the influence of COVID-19 on the economy.
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