How to Get More Bank for Your Money in This Economy

An environment of high interest rates and high inflation is not just a concern for Australian consumers. Big banks are also feeling the pain. The cash rate is currently sitting at a six-year high, while 30-year high inflation has affected people’s spending habits. It’s a perfect storm of bad conditions.

For those who own shares in Australian banks, don’t expect to see the record dividends that banks have paid in the past anytime soon. Lending slowed, savings rates slowed, and bank profits slowed accordingly. The peak of inflation is yet to come, so this gloom will only continue.

As many may have noticed, it’s not all sunshine and rainbows for big banks right now. However, some regional banks have made the most of current economic conditions and achieved better growth rates than their larger compatriots. Here’s where things stand for the Australian banking sector.

Big banks feel the effects of inflation

When interest rates rise, the typical wisdom is that banks make more money due to their increased margins.

However, this is not the case now; while higher bank-imposed interest rates are driven by the RBA’s aggressive upward cash rate adjustments, all to combat record runaway inflation.

Consumers are borrowing less and house prices are falling, but the interest banks charge for loans is rising. On the other hand, banks pay more interest to finance their lending activities.

And banks also pay more interest on the savings and bonds that consumers have with the bank. But this pool is less, because savings rates have fallen. And these trends appear to be continuing. So it looks like a zero-sum game, and with the added burden of other skyrocketing operating costs, big banks are feeling the heat.

Basically, inflation is at its highest level in 30 years and people’s spending behaviors have changed so they can try to weather the storm. People are being forced to spend more on groceries and gas, while trying to make higher mortgage payments. These facts mean that people across the country have tightened their belts and are borrowing less.

The double whammy of declining profit margins and lending activity has hit the big banks, and things may not change in the near future. If inflation continues to run high, it will further affect how much people choose to borrow. A less than ideal time could be around the corner for Australia’s big banks.

NAB’s home loan growth outpaces rest of big four

Of the big four banks, NAB has seen the strongest growth in home loans, taking market share from the other three.

In contrast, ANZ’s loan growth declined on an annual basis.

Despite a glimmer of hope among the big four banks, the decline in margins should be felt. Bank stock prices are down from the same time last year, and the outlook for lending-focused banks is bleaker than it was two years ago.

Keep an eye on regional banks

Recent data suggests that regional banks may continue to post better growth rates than large banks.

Bendigo and Adelaide Bank appear to be leading the pack with their home loans growing by around 11%. In reality, Silver Bendigo Bank magazine has named home-based lender of the year in 2021, and it seems consumers are increasingly drawn to the personal touch that regional banks can provide.

Focus on raw materials

Macquarie Group could also be the show stopper of the lot. As we know, inflation and commodity prices are good friends.

In the current climate, commodity prices have risen and market trading has picked up. Macquarie is making good profits (almost triple digit growth) from these divisions. It is therefore worth keeping an eye on their upcoming activity.

Don’t expect inflation to end anytime soon

The consumer price index (CPI) rose 1.8% last quarter and 6.1% since this time last year.

Goods were a major contributor to the increase in the last quarter, accounting for 79% of the increase. Of particular note is the 4.2% increase in the price of automobile fuel. Automotive fuel prices rose for the eighth consecutive quarter and are expected to continue to rise. As such, people are going to feel the pinch, especially when the current 22.1c/litre fuel excise cut comes to an end at the end of September.

We also know that another big component of inflation is utility bills, and given that coal is where Australia gets most of its energy and the futures price of coal ( an indication of where the price of coal is likely to go), is higher than where it is now, and we are not in peak coal demand season, we expect inflation empire.

Coal demand typically peaks in January as larger coal consumers increase demand and drive up the price of raw materials, which is expected to push energy bills in Australia to new highs.

So as long as there is inflation, interest rates are expected to be higher for longer. It’s grim when it comes to home loans.

The consensus is for rates to rise to 3.9% by the middle of next year, which will increase the average annual mortgage payment by nearly $7,000. With countless homebuyers taking out loans over the past two years in the hope that the Reserve Bank of Australia would not raise rates until 2024, it is estimated that around 2.5 million Australians have mortgages don’t have stamps.

Don’t be surprised if many homeowners are forced to sell in the near future, causing property prices to fall. This in turn is potentially contagious and can affect other homeowners, who may consequently find it difficult to refinance their mortgages due to falling home valuations.

Banks have long benefited from Australia’s housing boom.

However, in the face of margin compression caused by rate hikes as well as falling lending and property valuations, the short to medium term outlook for banks does not look too certain.

If you choose to put your money in banks now, in terms of investing, look for challengers with greater exposure to the commodities sector or those that lag behind the big four.

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