The inevitability of cycles

If resources had a super-cycle, banks have had a tsunami-cycle. CBA profits in 2006 were a little under $4bn on net interest income of $6.5bn and average loans of some $275bn. 2014 saw the numbers at $8.6bn profit, net interest income of $15bn and average loans of some $700bn. $6bn of operating expenses has grown to $9.5bn whilst claiming significant productivity gain. Bad debts are largely non-existent. This cycle has been made possible through ever lower interest rates. One does not need to be an astrophysicist to ascertain that if rates were 8% tomorrow, it may induce a few house price falls and the odd bad debt. So whilst there may be some scope to reduce rates further, it would seem wise to assume that the position of the banking system in the cycle is more akin to when iron ore was US$150 and oil US$110. At higher than normal multiples on current earnings, policymakers have ingrained the belief that banking and asset prices will have no cycle. This is always when cycles can wreak the greatest havoc. (VIEW LINK)