Australian Banks have reported weaker results than last year.

Outlook is less than optimistic.

The big 4 banks have reported for the half year and there have been some interesting outcomes. Essentially, the banks are way past their golden years.

With a higher cost of borrowing, combined with a lower margin on their lending, the big 4 are now finding life to be tougher than the past 8 years.

Back at the start of the GFC, the banks were able to use the Government’s credit rating to allow them to smoothly roll-over their monthly mortgage debt. (Banks make money by borrowing on a short term basis and lending long term). However the banks have been finding it harder to do so lately as they no longer have the backing of the Government’s credit rating.

The majority of the monthly refinancing takes place in European credit markets and these markets have been increasing their rates for some time now. So the Big 4 are finding that they are not making as much money because short term rates are rising, but long term rates are falling. (Think mortgages).

Essentially the credit markets are starting to wonder if the Australian banks are going to enter a period of instability. They are asking for a higher return as they believe that the banks have a large exposure to the residential housing market.

Below is a chart of the Credit Default Swap rate for the Australian banks. This is a measure of how much insurance the market wants for lending to the banks. As you can see, it moved sharply higher earlier this year when the equity market was falling.

CDS banks

To read more about the recent bank results, click here.

 

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