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Banks in the firing line as interest rates soar



The rising interest rates pose a significant risk for banks as they anticipate a potential surge in bad loans and defaults, writes contributor Will Banks

This concern is further amplified by the recession pressures on the global economy. If this scenario unfolds, a substantial number of mortgage holders may find themselves unable to keep up with their repayments.

Australia is not exempt from these risks, with the International Monetary Fund (IMF) recently warning that the level of risk in Australia’s housing market is the second highest in the developed world.

The IMF has identified higher levels of household debt, rising interest rates contributing to higher mortgage rates, and elevated house prices as factors that increase the risk of defaulting on mortgage repayments for Australian households with mortgages.

Today’s recession fears versus the GFC: What’s the difference? READ MORE

The IMF also notes that economies with higher house prices and household debt are particularly vulnerable to stresses in the financial sector, although it acknowledges that banks are better capitalised now than during the global financial crisis.

Despite this concern, Australia’s major banks have experienced a highly profitable 18- months, with earnings reaching nearly $AUD 30 billion, in 2022. The Commonwealth Bank (CBA) reported record 2023 half-year cash profit of $5.15 billion, representing a 9% increase. This substantial profit growth can be attributed to the rapid-fire interest rate rises, having inflated the bank’s profit margins.

In response to this positive financial performance, the bank significantly raised its dividend rate and increased the size of its share buyback program, actions that are expected to be well-received by shareholders.

KPMG: Major Australian Banks: Half Year 2023 Results Analysis

KPMG: Major Australian Banks: Half Year 2023 Results Analysis

On June 6th, the Reserve Bank of Australia (RBA) raised the cash rate target by 25 basis points to 4.10 per cent. The decision by the RBA in response to inflation in Australia, is likely to take some time before it returns to the target range. The banks should therefore not be complacent and understand the potential consequences of the current economic climate and consider measures to mitigate

the risks associated with higher mortgage repayments and the possibility recession pressures. It also remains to be seen how these challenges will unfold in the 12 to 24 month and how banks will navigate through them.

Bank profitability

Prevailing interest rates are a significant factor influencing a bank’s profitability. While rising interest rates can present challenges, they also create opportunities for banks to generate sustainable profits. Banks can achieve this by focusing on their net interest margin, which is the difference between the interest earned from lending and the interest paid on deposits. As interest rates rise, banks can adjust the rates they charge on loans to reflect the higher cost of funds. This allows them to preserve or even expand their net interest margin, ultimately leading to increased profitability.

CBA is a good example of this, as they have been increasing their lending rates at a faster pace than their deposits, which serve as their primary source of funding. In the last quarter, CBA’s net interest margin, rose by 18 basis points to 2.1%, underscoring record profit.

Australian banks have also benefited from having a diversified loan book.

By offering a mix of fixed-rate and variable-rate loans, banks can mitigate the impact of rising interest rates. Fixed-rate loans ensure a stable income stream as they are not directly influenced by interest rate fluctuations. On the other hand, variable-rate loans provide opportunities for these banks to adjust interest rates to align with market conditions. This diversification helps banks’ balance their risk exposure and maintain profitability.

Effective capital management is also crucial for banks during periods of rising interest rates.

As interest rates increase, the market value of fixed-rate assets can decline, potentially impacting a bank’s capital position. Banks must assess their capital adequacy and manage their asset-liability mix appropriately. This may involve adjusting the term of assets and liabilities to mitigate interest rate risk. Prudent capital management strategies enable banks to maintain a strong capital base and absorb potential shocks, safeguarding profitability.

On the other hand, other opportunities arise through investment and trading activities, with increasing yields on fixed-income securities.

Banks play a crucial role in ensuring economic stability by providing support to customers, maintaining strong capital reserves, practicing responsible lending, and collaborating with regulators. Through these efforts, banks must make significant contributions to the overall stability and strength of the financial system.

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Bitcoin surges past $44,000 amidst growing ETF enthusiasm



Bitcoin has once again reached the $44,000 mark, marking a significant milestone not seen since April 2022, as optimism surrounding the approval of Bitcoin exchange-traded funds (ETFs) continues to rise.

Investors and cryptocurrency enthusiasts are closely watching developments in the ETF space, with hopes of increased institutional adoption and regulatory clarity.

The latest surge in Bitcoin’s price comes as the U.S. Securities and Exchange Commission (SEC) is reviewing several Bitcoin ETF applications. These ETFs, if approved, would allow investors to gain exposure to Bitcoin through traditional financial markets, potentially attracting more institutional money into the cryptocurrency space.

Bitcoin’s price had been relatively stagnant in recent months, hovering around the $40,000 range. However, growing anticipation for ETF approval and positive sentiment in the crypto market have fueled the recent rally.

As a result, Bitcoin’s price surged past the $44,000 mark, reinvigorating interest among retail and institutional investors alike.

In summary, Bitcoin’s resurgence above $44,000 is fueled by mounting optimism regarding the approval of Bitcoin ETFs, which could bring more mainstream acceptance and investment into the cryptocurrency market.

As the SEC evaluates these ETF proposals, the crypto community eagerly awaits the potential impact on Bitcoin’s price and the broader digital asset landscape.

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Apple achieves milestone as market cap exceeds $3 trillion




In a historic moment for the tech giant, Apple Inc. has officially crossed the remarkable milestone of a $3 trillion market capitalisation.

The Cupertino-based company’s stock soared to new heights, closing at a record-breaking valuation, solidifying its position as the world’s most valuable publicly traded company.

Apple’s journey to this extraordinary market cap began decades ago in a garage, and today it stands as a testament to innovation and consumer demand. The company’s relentless pursuit of cutting-edge technology, coupled with its successful product lineup, has consistently attracted investors and consumers alike.

Investors and analysts are now pondering what lies ahead for Apple as it reaches this monumental valuation.

Will it continue its upward trajectory, or are there challenges on the horizon? With competitors in the tech space continually evolving, maintaining this valuation will undoubtedly be no easy feat.

One question that remains on everyone’s mind is, can Apple sustain its impressive market cap growth? Additionally, how will this achievement impact the broader technology sector?

Furthermore, what strategies will Apple employ to continue its dominance in the market? These are questions that experts and enthusiasts alike will be closely monitoring in the coming months.

In the midst of a rapidly changing tech landscape, Apple’s market cap reaching $3 trillion marks a significant moment not only for the company but for the entire industry.

As the company continues to innovate and expand its product offerings, the world watches with bated breath to see if it can maintain its position as the global tech juggernaut.

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Moody’s downgrades China credit outlook, cites growth concerns



Moody’s Investors Service has downgraded China’s credit outlook, expressing concerns about the country’s economic growth prospects and the ongoing property market crisis.

The credit rating agency revised its outlook from stable to negative, citing a combination of factors that are putting pressure on China’s economy.

China’s economic growth has been slowing down in recent years, and Moody’s warns that this trend is expected to continue. The country faces challenges such as high debt levels, a rapidly aging population, and a declining labor force. These factors could hamper its ability to sustain robust economic growth in the future.

Additionally, the ongoing property market crisis in China is a major concern for Moody’s. The real estate sector has been a significant driver of the country’s economic growth, but it is currently experiencing a severe downturn with falling property prices and a growing number of unsold homes. This crisis has the potential to further weigh on China’s economic performance.

Moody’s decision to downgrade China’s credit outlook raises questions about the country’s ability to manage its economic challenges effectively. It also underscores the importance of addressing issues in the property market to prevent a broader economic crisis.

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