Banks with too much money?

Robert Gottliebsen writes this morning about how the banks are flush with cash, For me this is a worrying trend because one of the reasons Australian banks did so well during the financial crisis was because they were so tied into lending money for housing that they didn't have much speculative cash to spray around. Remember too that so far the Australian property market boom has not yet busted although it certainly seems to be flattening. 

The banking game has taken a surprise twist. In March 2011 big banks have more money to lend than they ever dreamed of, which is a hidden force behind the banking price war.
Why are banks flush with funds? 

First, last year they lifted deposit rates and attracted a lot of self managed superannuation fund deposit money.

Second, although the $130 billion required by banks from the overseas wholesale markets for the current financial year was high, they met their requirements.

Thirdly, with the Australian economic recovery the banks expected medium sized business to come running through the bank managers’ door looking for loans. Instead the borrowers are absent. 

Gottliebsen goes onto suggest that the business confidence is low, especially in retail, that business is seeking other sources of capital and that some are just plain hostile to the banks excessive margins.

For whatever reason, the borrowers are not coming through the door so the banks have more money than they need. Interestingly one area where there is demand comes from dwelling and dwelling land developers. Yet the banks are still pulling the rug under residential property developers and remain cautious about loaning money for new developments.

The question is how long the banks will remain cautious and where they will go when they start spraying their money around. 

Gottliebsen argues that Wayne Swan should take a good deal of the responsibility.

Meanwhile the extra funding is also an ingredient (not the main one) in the banks mortgage price war.

Treasurer Wayne Swan might be under carbon tax pressure but he must smile every time he reads about the antics of the big four banks. Most analysts laughed at last year’s Swan banking measures but they were cleverly designed to make home mortgage banking a commodity product with much lower margins (Swan will make banks suffer, December 12)

And they are achieving exactly that. NAB might have started the war but the CBA is taking the commoditisation trend a significant step further by making a lower cost commodity product available to all.

It’s important to remember that house financing is very lucrative for the banks because they are able to leverage their housing loans much more than, say, a small to medium business loan. As a result return on equity is high.

And Australia has enjoyed a magnificent housing boom which has virtually eliminated significant bank debts in home mortgages.

The biggest beneficiary from the boom has been the CBA. Not surprisingly the CBA showed that when the NAB challenged it to retain market share. NAB will have to go one step further. In due course they will.

Meanwhile Westpac, which led the bank deposit market with 8 per cent five-year deposit rates at the start of 2010, has cut its five-year rate from 7.2 to 6.8 per cent over the last couple of months. Banks will want depositors to pay for their price wars.

Like most of the 30 per cent of households with a mortgage the banks are hoping that the housing market stays buoyant because so much of their profit comes form home loans. A substantial decline in house prices will make things very interesting for the banks, especially given their abundance of cash.