Satyajit Das says the big four banks are more vulnerable than they appear

If Australia is an economic miracle, with more than 25 years uninterrupted growth, then its banks are its most visible sign of strength.

After a near-death experience in the 1990s, they’ve reformed and bounced back dramatically: returns on equity now average around 15 per cent, compared to single digits in the US share prices and dividends have risen strongly over the past decade. At around twice book value, market valuations are well above global levels.

Australian banks are also more vulnerable to outside shocks than they may first appear.

Their loan-to-deposit ratio is about 110 per cent. Domestic deposits fund only around 60 per cent of bank assets; the rest of their financing has to come from overseas. While that hasn’t been a problem recently, Australia’s external position is deteriorating.

The top four are among the country’s largest listed companies, accounting for more than a third of total market capitalisation. Their combined assets account for about 130 per cent of GDP.

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