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Australian Building Approvals for August showed little sign of recovery, falling month on month in absolute terms for both new houses and apartments.
Private Sector credit for August rose at its slowest annual rate since 2011 and Australian broad money growth collapsed back to near its lowest level since the 1990’s recession also.
Australian Banks came under heavy selling pressure last week following the RBA’s decision to further cut interest rates to a record low of 0.75%.
It would seem a given that domestic rates fall again, perhaps before year end, to 0.50%.
Remember of course that the RBA is cutting domestic interest rates in large part to avoid any unnecessary upward pressure on the Australian Dollar, but that it is rapidly losing firepower, particularly as it seems increasingly likely that the U.S. Federal Reserve could be forced into a more aggressive rate-cutting cycle than it currently indicates.
Though all of the major banks failed to pass the full RBA rate cut, bank profitability is being rapidly eroded both by lower rates, but also by the increasing exodus of consumer deposits from banks as households chase higher returns elsewhere.
Australian retail bank business models are premised on cheap deposit funding from households and with collapsing domestic rates, profit margins are being hit on both the asset and liability side.
Only as interest rate hedges begin to roll off in the coming 2-3 years will we see the real impact on bank profitability, but as we have highlighted before, the top-rated analysts on the sector are looking for future earnings declines and future dividend cuts from Australia’s major banks.
We remain significantly underweight in our recommended weighting to Australian major banks.
Regards, Jono
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