April's RBA Board Rate Cut Announced: 0.25%
- Thread starter Rixter
- Start date
The point i was trying to make is that we shouldnt be trying to force the banks into making razer thin margins on residential property loans. I am happy for the banks to start creating a margin buffer zone on their lending.
This actually benefits me as a property investor. If the banks stay profitable they are less likely to resort to draconian lending standards. (To give you an extreme example why are banks so happy to issue credit cards: because they are sooooooooo profitable, who cares if bad debts double or even tripple, the margins are sooooo high, that unless there is a real mother of all blow out in bad debts).
Now im not saying margins on residential property should approach anything like those on credit cards, but i think you can see the point:
Profitable margins = happy to lend.
Let me put it another way, what happens if banks look at their margins and think stuff this im not going to lend, unless its to the very best of borrowers, so they start to resort to draconian lending practices such as requiring 30 or 40% deposits (ie maximum LVR ratio's of 60 or 70%).
If bank margins on residential lending is really artificially high, then give it time, over time competition will force those margins to more realistic levels (and im not talking about inter action between the big 4 banks, other financial institutions WILL come into play if the margins are fat enough. And if you dont see increased competition in the future, then that just means that the margins are not really that fat afterall.) Leave the market to sought itself out, the natural persuit of profit is the great equaliser.
I see the point you are putting forward, but the banks can never go back to draconian lending practice under the current financial model. Banks need to lend more and more money to remain profitable otherwise they should just shut their doors now and go into liquidation. The govts around the world understand this and that's why you are seeing things like quantitative easing(read creating money out of thin air), taking the toxic loans off the banks balance sheets and govt guarantees. In the long run I believe that this is unsustainable but it will be interesting to see how long they can keep it going for.
a)The old days weren't draconian. More recent times (perhaps all many here have experienced) were the aberration.
b)The argument that a bank would go into liquidation just because it's asset base doesn't grow at historical (and unsustainable) rates is so far off beam I won't comment.
In fact, the absence of off balance-sheet funding mechanisms (securitisation etc) means that capital management tools available as little as 2 years ago are gone and all banks are now potentially limited by their capital base.
Just as they should be! It was the explosion of off-balance sheet derivatives that brought the US financial market unstuck. Or more accurately, the lack of functioning regulation of the derivatives market.
A return to formal banking based on a solid bank balance sheet should improve asset market fundamentals as it puts a floor under prices and allows for steady inflation based growth and not bubble prices predicated on too much leverage of unregulated financial products. The sooner the US zombie banks' balance sheets are fixed, the sooner the world's biggest consumer market can find a floor and start rebuilding.
In Aus, our banks were tighter regulated, just as they were in Canada and a few other countries. This was part luck and part a result of the 90's recession and the near failure of a couple of our four pillars (or was it just WBC that almost went to the wall?). As such, they are less exposed to toxic assets and less at risk of balance sheet destruction. Sure, credit rationing is in force, but I support this action on the banks part as it sures up their balance sheets and protects us from US-type financial fall-out and associated asset devaluations. So long as our banks are still lending to "good risk" customers, there is a floor under the market. Although I agree that the credit rationing has lowered the floor a bit from where it was prior to credit rationing.
Cheers,
Michael
Gawd, how big a margin do you want them to create?
THis time last year their profit margin was 54.8%.....that's $1 of profit for every $2 of interest and fees collected....
IMHO, there are two reasons the govt has backed the banks building ever higher profit margins:
1.
to keep bank capital adequacy ratios acceptable. i..e CAR = capital / risk
Risk is going up, therefore capital has to go up to maintain CAR.
Capital requirements are expected to go up because foreign banks are increasingly less prepared to refinance commercial loans in Australia, and local banks have to find the capital to cover that, or many businesses fall over.
2.
To minimize the risk of the govt bank guarantee being called and to fund the Rudd Bank.
Whichever way the wind blows, the taxpayer will cover bank risk via higher bank profit margins, or tax funded bank bailouts....
How do you come up with profit margins of 54.8%?
Thanks for the link.
I still dont understand how the figure is calculated, given net interest margins in the statutory accounts show total net lending margins at around 1-2%.
Anway i will give the article to my broker and ask him to get some answers from their research department.
I'll be interested in their response as this isn't a straight forward issue and apra are considering changes to inclusions on bank balance sheets.
Uemployment Rate Wildcard
Hi Rixter, I remember reading in one of your posts I think a month ago that you had fixed at around the 5.2 mark. Re your comments on people missing the boat on securing a good fixed rate what are your thoughts on unemployment figures released and expected predictions to possibly hit double digit in months ahead?
I would have thought that this would put more pressure on the banks in the next few quarters to drive f/rates down further. I also locked in at 5.2 (for 3 yrs) and more than happy with this result for 2 of my IP's but I reckon there may be a little more give until we hit bedrock. Interested in your thoughts..
Hi Rixter, I remember reading in one of your posts I think a month ago that you had fixed at around the 5.2 mark. Re your comments on people missing the boat on securing a good fixed rate what are your thoughts on unemployment figures released and expected predictions to possibly hit double digit in months ahead?
I would have thought that this would put more pressure on the banks in the next few quarters to drive f/rates down further. I also locked in at 5.2 (for 3 yrs) and more than happy with this result for 2 of my IP's but I reckon there may be a little more give until we hit bedrock. Interested in your thoughts..
The headline is misleading. It's profit on net interest margin plus fees (i.e. after funding costs)
Henry, I locked in @ 4.99%. Whats written in the media I take with a grain of salt. Its all just noise to me and dont really focus on it. The media markets doom & gloom to the masses because that's what they listen to and what sells best. If you do what the masses do you will also get what they have. I keep my head down and just focus on doing what I need to do to get to where I want to go.
Macquarie reduced interest rates by..
0.1% following the RBA decision. Not sure if that is an across the board cut on all their loan products. It is effective April 27th.
0.1% following the RBA decision. Not sure if that is an across the board cut on all their loan products. It is effective April 27th.
