RBA’s ‘free-money’ fuelled profit boost as good as it gets for banks and shareholders

This year’s strong bank profits are all about ‘free money’ from the RBA but could this be as good as it gets?

The National Australia Bank profit detail confirms what the CBA numbers showed – this year’s strong bank profits are all about the ‘free money’ they’ve been getting from the Reserve Bank and the big provisions they made a year ago for loan losses that mostly never arrived.

The CBA reported its profit for the 2020-21 year to June up 20 per cent – but its profit before the loan loss provisions was almost exactly unchanged. To be pedantic it was down a tiny fraction.

Last year CBA put aside $2.5bn for expected loan losses after we all had just come through the biggest plunge in GDP on record in the June quarter and as we headed into the continuing Covid abyss.

This year it put aside just $554m.

Not only didn’t the losses come, but CBA – and all the other banks – then rode a home lending boom the likes of which they (and us) have never seen before.

On the one side they were able to play Santa, lending to owner-occupier buyers at barely 2 per cent interest – and rates not that much higher even for investors.

They were able to do so because the RBA was playing an even bigger Santa – and that meant the banks kept most of that 2 per cent or so interest as pure margin, because most of the money they were using to finance the lending was coming to them almost literally (interest) free.

The Commonwealth Bank of Australia has ridden a lending boom the likes of which it has never seen before. Picture: NCA NewsWire/Bianca De Marchi

The RBA was directly lending them – by the finish at June – a total of $188bn at an interest rate of just 0.1 per cent. The CBA got $51bn, NAB got $32bn.

Nice if you can get it. Money printed for you by the Government and carrying an interest charge of just 0.1 per cent; which you then very ‘generously’ lend out virtually risk-free at 2 per cent or more. Actually indeed, much more on – true, riskier - small business loans. I guess this is just another example of the “we are all in this together” – to sit right alongside with the politicians and the public servants, generously, on our shared behalf, not taking a pay cut or losing their jobs.

In fact this was the much smaller part of the benefit the RBA mandated for the banks. Its actions to keep bond yields down at the same 0.1 per cent meant the banks got most of the rest of their funding also dirt cheap to free. Deposits. Wholesale borrowing.

There was a small negative for them. They couldn’t lend it all out at 2 per cent plus; they all built up big cash balances and found they had the same problem that their depositors had: nobody would pay them more than close-to-zero interest on that cash.

So we see NAB reporting its June quarter profit before loan loss provisions down 1 percent, very similar to the CBA change for its full year.

But the profit after the loan loss provisions was only up 1 per cent, nothing like the CBA’s 20 per cent. How come?

Ah, it was all about the timing. NAB – and the other banks that balance at end-September, ANZ and Westpac – took their really big loan loss provisions in their profits for the six months to March last year.

The best guide to NAB’s real performance is this June quarter compared with the pre-Covid 2019 June quarter.

On that basis profit before loan loss provisions was up 5 per cent, while profit after those provisions – and a normal year two years ago - was down 6 per cent.

This points to the challenge going forward – into the current ‘New Normal’ of the ‘snap’ lockdowns that turn into weeks and months; and then whatever the ‘New Normal Version 2.0’ is once we are (nearly) fully vaccinated.

The banks have got the RBA’s – both direct and indirect – free money into 2024. But they might have to start making bigger loan loss provisions and, this time, actually use them. The growth from relatively riskless home loans is also likely to peter out.

This could be as good as it gets for the banks – and their shareholders.