Banks benefit as RBA’s ‘miracle recovery’ rolls on

RBA governor Dr Philip Lowe. Picture: Getty Images

With local house prices booming and some rare synchronicity in the global growth outlook across Europe, China, the US and Australia, you’d be hard-pressed to imagine a more supportive environment for the banks.

Long-time analyst Brian Johnson of Jefferies said on Tuesday if it weren’t for the Reserve Bank suppressing yields to stimulate the economy, the banks would be happily rolling in clover.

The industry has effectively dodged a loan-loss cycle, benefited from the $90bn JobKeeper program, rode a $150bn wave of surplus savings, and played the odds on international border closures.

If Australians were to redirect only two-thirds of the $65bn spent on overseas holidays to the local economy, it would more than offset the $40bn of activity normally generated by overseas visitors.

These are just some of the factors behind the extraordinary recovery of the domestic economy from the depths of COVID in 2020.

The theme of the miracle recovery was further developed in the minutes of the RBA’s April board meeting, released on Tuesday, which said the economy had returned to pre-pandemic levels by the end of last month.

A new set of economic forecasts will be released on May 7 - four days before the federal budget.

If there’s a risk to the global outlook, it’s a return of the virus in a more deadly, mutant form.

The downside risk, however, has so far been neutralised by a roaring US economy, prompting one economist to re-characterise the recovery as a “troubling V-shape”.

At the risk of analogy overload, Bank of England chief economist Andy Haldane has likened it to a “coiled spring”, with the rapid rollout of the UK vaccination program leading to “enormous amounts of pent-up financial energy waiting to be released”.

Like in Australia, the challenge once the spring is released - and the economy snaps back - is to harness the energy and drive growth to a higher level than it was before the pandemic hit.

Sure, there’s enough stimulus in the system to keep things chugging along, but there’s no evidence of a microeconomic reform program that would enable the economy to sustainably outperform.

Australia has an added, COVID-related exposure due to the slow rollout of its vaccination program.

The US and UK programs have proceeded at breakneck speed, fuelled by a desperate desire to avoid the kind of outbreaks which claimed far too many lives and came perilously close to overwhelming their health systems.

Independent economist Saul Eslake said Australia will be a “long way short for a long time” of the 70 per cent vaccination rate required to give countries some level of comfort that they’re protected.

In the meantime, international borders will have to remain closed, draining economic activity.

The RBA in its minutes was still able to bask in the glow of the rebound.

The board noted that the initial increase and subsequent decline in the unemployment rate had been “much sharper” than in the economic downturns of the 1980s and 1990s.

This was likely to limit longer-term scarring effects.

Yet again, the central bank highlighted that house prices had risen significantly in recent months, along with global asset prices, due to rock-bottom interest rates.

Growth in housing credit was about 4.5 per cent in the six months to February, driven by demand from owner-occupiers, with the high level of loan commitments indicating that home-loan lending was likely to increase in the months ahead.

Once again, however, there was “no notable evidence” of a decline in lending standards - the trigger for the introduction of macroprudential speed bumps.

Rising prices can reinforce a housing recovery by attracting investors and improving the collateral held by banks on their loans.

As Moody’s noted on Tuesday, there are also medium-term risks from weakening affordability and the COVID-related reduction in net migration.

But given where the nation was a year ago, any chorus of concern is overwhelmed by the continuing celebration over where we stand now.

Climate bankers wanted

They’re a rare breed at the moment, but the call for experienced climate bankers will become more prevalent as the countdown continues to net zero carbon emissions by 2050 in line with the Paris Agreement.

That’s why National Australia Bank will next month put a group of 25 corporate and institutional bankers through a new course developed for the bank by Melbourne Business School.

About 75 bankers will complete the course over the next 12 months, after which it will become a regular feature.

NAB announced last year it would manage its lending portfolio to achieve carbon neutrality by 2050.

The bank said it would work with 100 of its largest greenhouse gas-emitting customers to develop or improve their low-carbon transition plans by 2023.

Banks around the world are implementing similar strategies.

Last week, Lloyds Bank in the UK said it had established a specialist environmental, social and governance team to help corporate clients make their businesses more sustainable.

Lloyds wants to slash the emissions of the business and projects it finances by more than half by 2030.

NAB institutional boss David Gall told Four Pillars that, unlike Lloyds, the bank had no interim targets or objectives.

He said climate was a much higher priority for NAB’s group of 100 clients than it had been as recently as a year ago.

Many had built their own ESG teams and were hosting ESG investor days.

“We’ve told them we want to see their full climate plans and a strategic direction in place by 2023,” Gall said.

“A number have signed up for the Paris Agreement so it hasn’t been a standing start.”