Tuesday, July 26, 2011

Banks need to lower their expectations - the rest of us have

The Reserve Bank has a sobering message for investors in banks and the executives who run them -- get real, the days of double digit growth are over and are unlikely to return.

In speaking notes prepared for a Property Council seminar in Darwin yesterday assistant governor Malcolm Edey said while Australian banks had come through the crisis in good condition with lost profits restored it was unlikely they would ever again enjoy “the days of consistent double-digit growth in lending we saw in the pre-crisis years”.

“That growth was driven in part by factors that can't be repeated – the deregulation of the financial system and the transition to low inflation.”

“In the post-crisis environment, borrowers and investors are more cautious, both at home and abroad. That's likely to mean less demand for leverage and more reliance on equity funding, even when the economy itself is growing strongly"...

While slower credit growth would be good for financial stability, “it will also mean our lending institutions have to get used to lower rates of expansion than were typical in the pre-crisis years”.

His warning echos that of Bendigo Bank managing director Mike Hirst who this month called on investors to think of banks as more like utilities -- able to deliver stable but not spectacular growth.

''If you're demanding 20 per cent returns for something like that, then guess what, there's only one way you can get it. You take shorter term decisions and more risk and in the end it blows up in your face,” he said.

His message may not have got through to the Australian Bankers Association. Late last year it published a press release and graph arguing that it was reasonable to expect a return to the rate of profit growth in the five years leading up to the crisis.

Published in today's SMH and Age

Evidence the Bankers Association doesn't get it:

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