Low rates, more bank pain tipped for 2020

WHAT AWAITS THE FINANCIAL SECTOR IN 2020

* BANKS TO CONTINUE THEIR ROUGH RUN

A heady cocktail of low interest rates, huge remediation bills and tightening margins has wreaked havoc on a banking sector already skint on public faith.

And with Westpac’s child exploitation scandal taking sentiment to a fresh nadir, you can bet your franking credits there’ll be more PR work for at least one financial behemoth in 2020.

Profit at NAB, ANZ, Westpac and Commonwealth Bank fell by 7.8 per cent – or $2.27 billion – in FY19 as the quartet set aside millions to compensate customers over the sort of issues aired at last year’s royal commission, and for restructuring in expectation of a low-growth future.

Of course, the financial and reputational cost for Westpac is set to be even greater.

The bank’s lawyers have signalled they expect the bank to admit to all or most of the 23 million breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act it has been accused of by the Australian Transaction Reports and Analysis Centre.

AUSTRAC is seeking a civil penalty of between $17 million and $21 million for each offence, making the maximum fine a potential, if unlikely, $483 trillion.

A set of agreed facts is being worked on with a penalty hearing to take place in the Federal Court in February or March, the beginnings of what will likely be a tough year for the country’s second largest lender.

* WILL LOWE GET UNCONVENTIONAL?

The cash rate was cut to a new all-time low three times in 2019 as the economy slumped, and is tipped to head even closer to zero in the new year – probably as soon as February.

But despite running low on powder, Reserve Bank boss Philip Lowe has shown little appetite to commit to unconventional policy measures such as quantitative easing.

Still, the prospect of QE – which would involve the central bank purchasing government bonds in order to boost cash supply, and encourage lending and investment – appears increasingly likely, especially if Australia’s growth outlook continues to soften, labour market slack persists, and any sign of a wages pick-up remains elusive.

The RBA is widely expected to lower the cash rate from 0.75 per cent to a new all-time low of 0.5 per cent in February in a fresh attempt to kickstart spending in a household sector that has taken any recent stimulus measures to the bank instead of the shops.

Dr Lowe says he does not expect to have to use quantitative easing in Australia but, then again, the RBA was predicting the next rate move would be up, not down, this time last year.

* PROPERTY SURGE TO CONTINUE

One – if not the only – area of the economy that has benefited from an easing of monetary policy is the country’s $6.6 trillion property market.

And the price surge over the back half of 2019 shows no sign of abating in 2020 – even as concerns remain that continued ultra-low interest rates could reinflate Australia’s housing bubble.

In tandem with looser lending standards, three rate cuts since June have helped put housing values on track to reverse an 18-month downturn and hit new peaks by March, even as the broader economy flatlines.

Property prices banked their fifth straight month of gains in November with a 1.7 per cent climb – the largest monthly gain since 2003 – with the largest markets of Sydney and Melbourne fuelling the surge.

The trend could prove a saviour for the construction sector, which has suffered a severe downturn in new home approvals, while others say a continued property market recovery will help boost consumer wealth and spending power.

However, RBA board members have expressed concern that, with housing prices and auction clearance rates already recovering from a two-year decline, property prices might be “overly inflated” by lower interest rates as banks pass on their lower borrowing costs in the form of reduced mortgage rates.

* AUSTRALIAN STOCKS TO KEEP CLIMBING

Also hitting new heights during 2019 was the benchmark ASX/200, up more than 20 per cent for the year (at the time of writing) for the bourse’s best year in a decade.

The index peaked at 6,893.7 points on November 29 – a new intra-day record – and the All Ords reached a new crest of 6,995.9 points at the same time thanks to low interest rates and the resumption of trade talks between China and the US.

Continued strength in equities in 2020 is expected, though is reliant on healthy relations between US and China, as well as an orderly resolution of the Brexit process.

While the US presidential election in November must also be factored in, continued improvement in local house prices, further economic stimulus from the RBA and accelerated federal government infrastructure spending should boost confidence in the market.

AAP

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