According to Glenn Stevens, Governor, Reserve Bank of Australia, “earlier, more conservative lending practices and relatively modest holdings of complex securities have left both Australian and Canadian major banks more profitable and well capitalised than their global peers.”
Analysts are of the opinion that very soon Australian banks will join Canada‘s major lenders in the single A credit rating ranks and risk copping higher wholesale funding costs unless their high proportion of loans to deposits is not pared back significantly.
The recent bank reporting season showed how the major banks have increased their home loans, at the same time competing aggressively for household deposits to reduce their dependence on short-term wholesale funding. For example, Commonwealth Bank (CBA), the Australia‘s largest home lender, increased its market share by 2.15%, by offering low interest rate in just over one year – quoted news.smh.com.au.
The Australian banks’ lending exceeded the deposit growth and left domestic banks with higher loan to deposit ratios than banks in the US, UK, Europe and Canada, with whom they are often compared. In fact, the average loan to deposit ratio of the big four banks is 153%, compared to 144% of UK banks, 110% if US banks and 74% of Canada‘s big six local banks.
Unless this ratio is brought back drastically to satisfy global ratings agencies like S&P, Moody’s and Fitch, there is every possibility of them being relegated to risky status and may face higher offshore wholesale funding costs.