Bank profits to be minimally affected by low rates

While low interest rates are having a negative effect on saving rates, the Reserve Bank of Australia (RBA) has indicated Australian banks will feel less of an impact than other global banks. 

Rates were cut from 0.5% to 0.25% in March and then to 0.1% in October, a record low for the country, and it was expected they would be held at this rate for several years.  

However, a small impact on profits would be a positive for income investors who relied on dividends paid by the big four banks. 

In a speech by RBA head of financial stability, Jonathan Kearns, at the Australian Finance and Banking conference, he said banks had little interest rate risk and would likely be less affected than their peers. Other countries such as the UK and the US had held rates are low levels for several years prior to this crisis. 

Discussing the long-term impact of low rates, Kearns said: “Very low interest rates may well reduce Australian banks’ profits but possibly by less than for banks in other jurisdictions. Australian banks haven’t faced very low rates for an extended period but estimates for Australia by the Reserve Bank find that a 100 basis point downward shift in the yield curve lowers the return on assets by about five basis points after one year. 

“These estimates are around the lower end of the range of estimates internationally, consistent with the intuition that the impact may be smaller.” 

This was due to the little interest rate risk and the use of interest rate hedges which smoothed profits and delayed the reduction in profit from interest rate falls and the composition of liabilities. 

“Australian banks are better prepared than they were prior to the Global Financial Crisis. Their much higher liquid asset holdings helped earlier this year. Banks are well capitalised. Importantly they have large buffers which are there to be used, not preserved, and will enable them to continue lending and supporting their customers, and so the economic recovery,” he said. 

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