Australian banks' cost of funds are lower than a year ago despite many of them reducing the interest rate they offer depositors and being downgraded by credit rating agencies, the Reserve Bank says.
The major banks have enjoyed an increase in deposits despite banks reducing interest rates paid in line with a record low cash rate of 1.5 per cent, the RBA said in its Financial Stability Review report on Friday.
Banks had ample access to funding sources and fund inflows have been strong enough to boost deposits faster than assets over the past year, the Reserve Bank found.
Banks have also benefited from the gap between short-term and long-term wholesale funding narrowing considerably.
"The strong growth in deposit funding has meant banks have only slightly increased their funding from wholesale markets in absolute terms, and reduced it as a share of total liabilities," the RBA says in its half-yearly Financial Stability Review.
Interest rates on three-month and six-month term deposits slipped to their lowest level in decades, at around two per cent but that has seemingly not deterred households from parking funds with banks.
Bank profitability is high and they are seeking to maintain this by reducing lower-yielding assets, both domestically and abroad.
Banks have scaled back more capital intensive activities that don't generate sufficient returns, such as international operations and institutional lending, the RBA says.
Over the years, they have also made adjustments to their lending activities such as a continued shift towards housing lending, which requires less capital.
"Most of the major banks have also sold or are in the process of selling parts of their wealth management and life insurance operations," it said.
The Australian Prudential Regulation Authority (APRA) recently announced requirements for 'unquestionably strong' capital ratios that will place the major banks within the top quartile of international peers.
The central bank, however, cautioned investor's expectations for returns from the sector, saying the increase in banks' capital over recent years has made them more resilient but also lowered return on equity.
"Despite this, investors appear to still be expecting similar returns to those sought a decade ago. This tension could motivate banks to seek higher returns by taking on additional risks," it warned.
Regulators have had to increase their focus on the risk culture of banks and the industry is also taking steps to strengthen their approach, the RBA said.
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