{"id":30683,"date":"2012-07-06T00:11:22","date_gmt":"2012-07-06T04:11:22","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/07\/australian-banks-are-moving-into-bust-phase\/"},"modified":"2012-07-06T00:11:22","modified_gmt":"2012-07-06T04:11:22","slug":"australian-banks-are-moving-into-bust-phase","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/07\/06\/australian-banks-are-moving-into-bust-phase\/","title":{"rendered":"Australian Banks Are Moving Into Bust Phase"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

Credit and money lending have gained bad reputations recently.<\/p>\n

Yet, without them the economy would grind to a halt. Innovation would cease, and living standards would drop.<\/p>\n

As long as it\u2019s well managed, credit is a virtue.<\/p>\n

But as we all know, sometimes it isn\u2019t<\/em> well managed. And that\u2019s where things don\u2019t always go to plan\u2026<\/p>\n

<\/span><\/p>\n

You see, when there\u2019s too much credit, an economy booms. But if it booms too much, it can overheat. Of course, in a free market <\/a>that shouldn\u2019t be a problem, as an economy has a natural cleansing system.<\/p>\n

Firms go bust, investors lose money, but the economy \u2018refreshes\u2019 and things move on. The result is capital flowing toward its most productive use. To where it\u2019s useful, rather than being locked up in bad businesses or investments.<\/p>\n

This process of boom, bust and recovery is the business cycle.<\/p>\n

The thing is, those in government only like the booming part of the process. They aren\u2019t keen on the bust. So as you\u2019d expect, governments tend to interfere<\/a> in the market to sustain booms and avoid busts.<\/p>\n

That\u2019s what the world economy is going through now. The latest European bailout package is a classic example \u2014 solving a debt problem by issuing more debt.<\/p>\n

But it doesn\u2019t solve anything. Consumers and businesses become too afraid to borrow. And banks won\u2019t lend because they\u2019re too busy shoring up their balance sheets\u2026to make sure they don\u2019t collapse under the weight of bad loans on their books.<\/p>\n

That means banks worldwide are seeing their margins squeezed, and profit growth slowing\u2026even going into reverse.<\/p>\n

A Slipping Lifeline for Australian Banks<\/h3>\n

<\/center><\/p>\n

Last week The<\/em> Age<\/em> ran a story trumpeting the success of the major Australian banks. The article noted:<\/p>\n

\n

\u2018Australia\u2019s big banks have been ranked the most profitable in the developed world for the second year running by the influential Bank for International Settlements\u2026<\/em><\/p>\n

\u2018Commonwealth Bank, Westpac, ANZ and NAB posted pre-tax profits equal to 1.19 per cent of their assets in 2011\u2026\u2019<\/em><\/p>\n<\/blockquote>\n

Australian banks<\/a> may be top of the pile, but there isn\u2019t much to be proud of.<\/p>\n

To put things in perspective, in order for Commonwealth Bank [ASX: CBA]<\/strong> to make a $6 billion profit, it needs a loan book of $500 billion.<\/p>\n

That\u2019s a lot of effort and risk to make a tiny 1.19% return on assets. And that\u2019s the pre-tax number. After tax, the return on assets is less than 1%.<\/p>\n

Even so, it wouldn\u2019t be so bad, if not for the fact that this profit margin comes at the top of the Aussie banking business cycle.<\/p>\n

And remember how the business cycle works. What comes after the boom? That\u2019s right\u2026the bust. <\/p>\n

That\u2019s what central bankers and governments the world over are doing their darnedest to avoid.<\/p>\n

Cheers,
\nKris.<\/strong><\/p>\n

PS.<\/strong> In the latest issue of Australian Small-Cap Investigator<\/a><\/em>, we took a closer look at the Aussie lending market and discovered a company that not only has a sensible risk-weighted approach to setting interest rates, but is also an innovator in the market. To find out more about this company, click here<\/a> to take out an obligation-free trial to Australian Small-Cap Investigator<\/em>.<\/p>\n

Related Articles<\/em><\/strong><\/p>\n

Market Pullback Exposes Five Stocks to Buy<\/a><\/p>\n

The Interest Rate Banana Your Stocks Will Slip On<\/a><\/p>\n

‘Big Wednesday’ For the Aussie Dollar<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nAustralian Banks Are Moving Into Bust Phase <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Credit and money lending have gained bad reputations recently. Yet, without them the economy would grind to a halt. Innovation would cease, and living standards would drop. As long as it\u2019s well managed, credit is a virtue. But as we all know, sometimes it isn\u2019t well managed. And that\u2019s where things don\u2019t always … <\/p>\n

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