What do we take away from the recent RBA rate cut, where the big four banks changed tactic and only passed on half of the rate discount and shifted focus towards bank deposit rates?
As we are all aware, we are in unchartered waters with rates being at a record low level and speculation suggests we’re not done yet. There are a few obvious clues we can use to deduct some answers to the shift in strategy by the big four. Let’s not forget, other countries have already had to combat record low rates ahead of Australia. This gives the Australian banks some strong reference points to base their decisions on. Besides, the Australian banks are amongst the most advanced strategically.
Unless you are a politician and trying to gain support by seeming to be siding with the population and ‘loosely’ suggesting the banks should be investigated for shorting the rate cut, we should be looking deeper as to why the banks have acted in unison.
In times of low interest rates, it also means lower profits. Whilst this may not have been a problem previously, it’s fast becoming an issue as rates approach 1% or even lower. To add to this, traditionally with lower interest rates, comes increased borrowings and increased housing price potential. Needless to say, the banks must generate alternative profit sources whilst maintaining a suitable pool of funds on hand to be lent out.
As much as I am all for ensuring the banks pass on maximum benefits, I’m also acutely aware that the big four banks remaining highly profitable is the cornerstone to our economy surviving total collapse. If our banks fall over, we’re all in big strife. We’re not in an economy of excessive profits whilst we are enduring record low rates. I believe we need to be reading the hidden message from the big four.
We’re in for tough times ahead. We may have escaped the global crisis with only some scratches and bruises but consider, the holding back of the rate cut is suggestive of grave concerns for the future economic conditions we’re sailing directly into.
We’ve already seen the demise of the mining industry across Australia.
We’re currently experiencing a foreign investment slow-down and consumer debt levels are at record high levels. This doesn’t paint a pretty picture, especially whilst other countries are already crippled from recent storms.
We can’t escape the consequences this time. Rightfully so, the big four are bracing themselves, battening down the hatches and changing course to weather the storm as best as possible.
Diversification will be a strong focus, enabling multiple profit points which will involve heavy investment into fintech innovation across the financial services sector.
The key learning for the industry is to heed the warning, and start preparing for a big storm.
Rather than engaging a defensive strategy, this time also presents a wide array of opportunity to embrace the technological advancements and profit from strategic partnerships with emerging fintechs as well as the wider industry allies.
John can be contacted on 0749722081 or 0410433919. or email him at jwhitten@ihl.net.au or net www.ihl.net.au. John Whitten is a credit representative (CRN 399796) of BLASSA Pty Ltd (Australian Credit Licence No 391237).
