NAB results show why banks like rising interest rates

NAB is the first of the big four banks to show how the first increases in interest rates in more than 10 years are treating it. The answer is – quite nicely, thank you.

And it will get much nicer in this current quarter when NAB – and all the other banks – will have had the benefit of higher rates for the entire three months.

This is most certainly not to suggest that in contrast, the preceding 10-plus years of falling rates caused NAB and its peers any pain.

Indeed, the last two-and-a-half years of zero rates and close to $4 trillion of - quite literally – free or almost free money, courtesy of a panicked Reserve Bank, has been the sweetest time to be a banker in the entire history of modern mainstream banking. It was very simple. The RBA directly gave the banks $188bn of free money – the interest rate charged was just 0.1 per cent.

And it mandated that they got most of the rest of the near $4 trillion they borrowed – nearly $3 trillion from depositors, a further $1 trillion in the money market – would be at or near a zero interest rate. That’s of course after bankers themselves joined the panic in the early months of Covid, and set aside some billions of dollars for loan losses that never arrived.

As RBA Governor Philip Lowe has actually said, his actions in the early days of Covid were driven by the expectation of tens of thousands of Covid deaths in Australia.

Presumably, banks executives thought they’d be conducting forced sales of tens of thousands of properties owned by those Covid victims.

NAB chief executive Ross McEwan.

Those unneeded loan loss provisions from the early days of Covid have been very handy for the banks to write-back into profit – and they haven’t had to make the regular loss provisions.

NAB’s quarterly statement Tuesday spelt this out.

Back in mid-2020, NAB provided a thumping $1600m for loan losses. In the seven quarters since then, it’s actually written back a total of $204m; and is still very, very – as in, over – provisioned against loan losses into this rising rate future.

Most bank loans are to property buyers –across the system, according to the APRA numbers, a total of $2 trillion, split two-thirds to owner-occupiers and one-third to investors.

In comparison banks have just over $1 trillion lent to business.

Even sharp rises in home loan rates are unlikely to cause much of a blip in loan defaults.

Despite the hysteria in the media and among so-called experts over property price plunges, the vast majority of borrowers have and will continue to have very significant equity in their properties, and most borrowers are months and indeed up to two years ahead in their repayments.

With the first RBA rate rise in early May, NAB’s June quarter result comprised about 50 per cent before the rise and 50 per cent after it.

NAB’s operating revenue was up 3 percent and profit 2 per cent compared with the average of the first half (to March) quarters.

Excluding its financial trading activities (Markets and Treasury) – and so the best indicator of the margin between what it pays depositors and charges borrowers – NAB’s net interest margin was up “slightly”.

This reflected the “benefit” – nice of NAB to be that honest –of a “rising interest rate environment”, partly offset by “home lending competition” and higher “wholesale funding costs”.

Translated, that meant NAB – like all the banks – passed on the rate hikes to the borrowers, well, promptly.

They then “gave away’’ some of that to ‘buy’ new borrowers with cheaper loan rates and paid higher rates on money raised from the ‘big end of town’ in the wholesale market.

But as for ordinary depositors, you might well say that ‘the cheques in the mail’.