RBA and Covid panic pump up bank profits

Since 2020 all the banks have produced ‘sparkling’ results.

Everybody and I mean everybody panicked in the early days of Covid and our four big banks were right up there with ‘everybody’.

Expecting homeowners to default by the tens of thousands as they lost their jobs – or indeed were slaughtered by Covid - and SMEs to follow as the economy plunged into Great Depression Version 2.0, the banks back in 2020 all provided for massive loan losses.

Well, those loan losses, those expected mortgage defaults, never arrived; the provisions were all unneeded.

Indeed, the very opposite was the case.

The banks were able to embark on an orgy of home loan lending as the Reserve Bank gave them – directly and indirectly - hundreds of billions of dollars of free money; they simply slapped on a 2 per cent all-profit margin; and shovelled it out the door.

Quite simply the banks have never had it better than over the past 18 months.

No lending is safer than to homebuyers. No lending is easier than when you are handing out almost free – mortgage rates at 2 per cent and even lower – money. Never have bank executives, from CEOs down, more easily ‘earned’ their multi-million dollars salaries.

Those that fell on their swords – or were pushed onto them – after the Hayne Inquiry must be spitting chips; this was supposed to be the post-Hayne era when bank executives donned sackcloth and took vows of purity and poverty.

So, since 2020, all the banks have produced ‘sparkling’ results, when in fact rising profits have had nothing to do with supposed management brilliance or even competence, but simply a consequence of three accounting and financial realities.

One, they haven’t had to make the normal bad debt provisions they usually have to do.

Two, they actually got to write back as income the panicked, excessive, provisions of 2020.

Three, their lending continued to grow and their profit margins were all but unchanged thanks to the free money and the rocketing demand for more and bigger loans from homebuyers.

If you dig into the NAB profit Thursday, you can see that in 2020 it set aside $2762m for expected loan losses.

When the losses didn’t arrive, not only didn’t NAB need to make the usual loss provisions in 2021, it actually wrote back as income $217m of the 2020 provisions.

In this latest half, it’s set aside just an utterly trivial $2m for possible losses.

This is important in getting an accurate sense of exactly how the bank really performed.

NAB’s profit before these artificially distorted loss provisions was up 6.3 per cent, somewhat better than the 4.1 per cent the bank modestly reported.

The main driver was a 3.6 per cent increase in net interest income, as NAB – like all the banks – was able to sail through the zero-interest environment, with very little slippage of its interest margin; when for technical reasons, which I don’t have the space to detail, the margin should have plunged.

Exactly the same was the case down the road with the ANZ, which reported its profit Wednesday; and will also be the case with Westpac which reports next week.

Back in 2020 ANZ provided $2738m for loan losses that never arrived. Again, not only didn’t it have to set aside any fresh provisions in the normal way in 2021, it actually wrote back as income $567m in 2021 and has now written back as income a further $284m in its 2022 first-half.

So, the ANZ’s real operating profit was up 22 per cent March half on March half, and even 6 per cent from the very good result it posted in the immediately preceding September half.

Again, thanks to being able to maintain interest margins – and of course, the RBA.