3 month LIBOR has jumped 60 basis points since March which means...

3 month LIBOR has jumped 60 basis points since March which means for those Australian banks rolling offshore borrowings, costs are increasing. This is at a time when the A$ F/X rate deteriorating against the majors and margins on the domestic loan book are under compression….

Mortgages, 70% of the Australian banks loan portfolio - support non-productive asset(s) ….…… in the 1960’s to 1990’s this was acceptable as the mortgage book was (in turn) supported by domestic savings

The Australian saving ratio used to (typically) ran around 15%…

Australian Savings Ratio - 50 year History

Not anymore …. Australia has changed from a society of thrift to a society of consumption and with it a collapse in the savings ratio…..

… but at the same time as mortgage lending exploded. Source of funds? Offshore borrowings

There is now a risk of an accelerating spiral rendering even the “well capitalised” banks as long term vulnerable if the current health emergency endures for more than 12 months.

Unfortunately for the Australian retiree banks must terminate all distributions. This is already happening on a global basis - JP Morgan is going to terminate shareholder distributions for the first time in its history: the European Central Bank has ordered the European banks to terminate distributions as has the RBNZ.

There is a view that pandemic shutdown should it last longer that 3 months, will cause a systemic failure in the banking industry. I don’t subscribe to this but I am of the view that the Australian banking system is significantly more vulnerable than current prevailing wisdom..…. Does this mean we’ll see any of the four majors fall taken into public ownership…. possibly… Westpac is facing 26 Class Actions but on the other hand, the CBA is still generating > $25 billion revenues…. difficult to see the Commonwealth being returned to pubic ownership but these are difficult times: Westpac, NAB and ANZ….not so sure

It may be the case that the dogma to which Morrison and the LNP subscribes is soon to be subject to review. It made little sense under the Howard administration to allow Ansett to collapse - but they did: it now makes little sense to inject A$-billions into Virgin Airways without taking control: ditto the banks. If any of the four majors require government support , this should only be provided in the form of equity