On Friday, the Reserve Bank of Australia issued its quarterly statement on monetary policy, in which it said that official interest rates remained relatively low.

The central bank has lifted rates twice over the last two months, hiking interest rates by 25 basis points in October and again at the start of November.

Many analysts believe that a further rate hike in December is likely, and would not pause the tightening cycle until mid 2010, or until the official interest rate stands at 4.25 per cent.

The central bank has forecast GDP growth of 1.75 per cent for the 2009 calendar year, and expects the economy to grow by 2.25 per cent for the year ending June 2010, and 3.25 per cent by the end of 2010.

Previously the RBA expected growth of 1 per cent and 2.25 per cent, respectively.

Despite the prospect of further interest rate hikes, some analysts suggest that mortgage borrowers will be spared an increase next month.

The central bank expects inflation to be moderated as a result of a slowdown in wage growth, and lower prices for imported good due to the stronger Australian dollar.

The RBA expects a further moderation in price pressures following a slowdown in wage growth and lower prices for imported goods.

The central bank has a target range for inflation of between two and three percent over the medium-term.

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Mrs. Kelly, who assumed the role of chief executive of Westpac after first heading up St. George prior to its acquisition, said that St. George was in better shape after the merger and had not suffered as a result of its acquisition.

St George’s operating income has grown 11 per cent over the last year, to $3.28 billion from $2.94 billion, whilst its earnings increased by 16 per cent to $2.08 billion.

“St George is actually stronger and healthier now than it has been. It occupies the positive of the fifth-largest bank and the largest regional player by a long way. What St George has done is to implement a new regional structure. There is now a lot of authenticity and authority in these regions.” Mrs. Kelly said.

Westpac has deliberately implemented a strategy of maintaining St. George as an independent entity instead of integrating the lender into the bank’s main operation.

The business model replicates Bank SA, also owned by Westpac, which is divided into key regional areas that report to management.

“St George has drawn from the Bank SA performance, which is a little gem of a business,” Mrs. Kelly said.

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Mike Codling of PwC says the performance of the majors during 2009, showed that they managed to weather the financial crisis successfully.

“My sense is that the banks have turned a corner towards positive earnings growth after two years in a row of reduced earnings. In my view, net interest margins will continue to increase and I believe we may have passed the peak in credit losses. If the bad debt expenses return to more normal levels in the future, the banks appear well positioned to improve their earnings.” Mr. Codling said.

The majors posted an aggregate $17 billion or 2.4 per cent decline in underlying cash earnings during 2009, in the wake of a near doubling in credit impairment charges.

Mr. Codling says he believes that the majors are well placed to continue their focus on maintaining higher deposit growth which will support business activity.

Deposit growth and wider interest margins drove profits in fiscal 2009, which offset anaemic growth in total lending, Mr. Codling said. Retail deposits will remain the cornerstone of a stable funding base for the Australian banks, he added.

Since September 2008 deposits have grown 13 per cent while loans grew just 11 per cent.

Domestic household and business deposits gave the big four banks $74.7 billion in incremental funding, but total business lending fell 4.6 per cent during fiscal 2009 PwC said.

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The Sydney based lender, announced an 8 per cent fall in annual profits to $4.6 billion, and said that credit impairment charges had likely peaked during the June quarter, but also warned that 2010 would remain challenging.

Westpac chief executive Gail Kelly said that global banking regulators face a delicate balancing act in their response to the financial crisis.

“I’m hopeful we’ll work it through; I think we will get it right. We can’t afford to not (get it right).” Mrs. Kelly said

Westpac is the last of the Big Four banks to report its 2009 profit.

The Westpac chief said that though business conditions had improved, uncertainty in global markets remained, and the recovery was likely to be  gradual.

“Credit growth is expected to remain relatively subdued as the impacts from the financial crisis continue. Average funding costs are expected to continue to increase as the intense competition for retail deposits remains, and as wholesale funding is sourced at a cost well above pre-crisis levels. In addition, as government fiscal support continues to be scaled back and interest rates move upwards from their very low emergency settings, ongoing caution is likely to be applied to business and consumer budgets.” Mrs. Kelly said.

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The Melbourne based lender joined the three other major banks in lifting their rates by 25 basis points on Tuesday, in line with the 25 basis point hike in the official cash rate.

In an unusual move however, Westpac said it would insulate small businesses from the increase in interest rates.

Last month,  ANZ chief Mike Smith made headlines by suggesting he would be “reluctant” to increase variable mortgage rates out of step with RBA adjustments.

Mr. Smith later clarified the comment by saying his reluctance did not represent a firm commitment to not set its interest rates outside of RBA policy, and that ANZ would respond, should rivals lenders choose to set rates out of synch with the central bank.

Graham Hodges, ANZ’s deputy chief executive said on Tuesday that the lenders mortgage margins faced pressure from rising average funding costs.

“If sustained over time, there will be commercial pressure to pass the additional costs on. Right now, it’s in everyone’s interest that the recovery consolidates and the right thing to do at this point in the economic cycle is for us to absorb the additional funding costs and pass on only the amount of today’s official increase to our mortgage and small-business customers.” Mr. Hodges said.

The Big Four all followed the central bank’s lead by raising rates by 25 basis points. CBA and NAB currently have the lowest variable mortgage lending rate at 6.24 per cent, whilst Westpac and ANZ have marginally higher variable rates at 6.31 per cent.

Westpac made an exception for small businesses and said it would not lift interest rates on variable rate loans extended to small business customers.

Australian banks face strong political pressure whilst sovereign deposit and funding guarantees remain in place, to minimise rate rises in order to help with economic recovery.

Most banks also lifted their deposit rates on Tuesday, as intense competition for deposits remains, fuelled by smaller regional lenders disadvantage in wholesale debt markets.

Westpac group executive for retail and business banking, Peter Hanlon, said deposit rates were at their highest level above the cash rate “in recent memory”.

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Gross written premiums are expected to rise by 10 per cent to $14.4 billion in 2009 rather than the initially forecast $16.2 billion.

The robust Australian dollar has affected top-line revenue growth and the company’s net profit, QBE said during an investor presentation on Monday.

In local currency terms, the GWP outlook was little changed from targets set in the company’s annual report in February.

QBE, the largest Australian insurer, said that the lower cost of catastrophe had offset higher than expected claim frequency. The company also noted there had been lower releases of claims provisions from previous years.

QBE expects combined operating ratio for 2009 to be 87-89 per cent, and the insurance margin would be 17-18 per cent. Net investment yields had increased in the second half of the year because of the rise in equity markets.

The insurance major is considering making future results presentations in US dollars, the currency in which it derives more than 50 per cent of its premium income.

QBE says it expects next year’s Australian Gross written premiums to vault by 24 per cent to $4.2bn.

The company says it also expects Gross written premiums from its European operations to be the largest by written premium, and expects an increase of 8 per cent to $5.12 billion.

The Americas will increase 10 per cent to $5.01bn, whilst the Asia-Pacific operation will gain 14 per cent to $800 million, subject to currency fluctuations.

At the current value of the Australian dollar, the total GWP for next year would be $15.1bn, still below the previous $16.2bn forecast for this year.

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The official cash rate was raised to 3.50 per cent from 3.25 per cent following the central bank’s monthly board meeting.

This is the second interest rate hike in as many months, and will increase the average monthly payment for a $300,000 mortgage by approximately $46.

The rate increase was the second consecutive increase in as many months, since the RBA first began tightening, by raising the cash rate by 25 basis points on October 6th.

The central bank’s move was widely expected by both economists and financial market participants, though a few analysts suggested the increase could have been by as much as 50 basis points.

RBA governor Glenn Stevens said economic growth is likely to be close to trend over the year ahead and inflation close to the central bank’s two to three per cent target.

“With the risk of serious economic contraction in Australia now having passed, the board’s view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker, The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.” Mr. Stevens said in a statement.

The RBA governor said the economic climate in Australia was better than expected, as both consumer and business confidence continue to recover, coupled with early signs of improvement in the labour market. It also appears that private investment would not be as weak as earlier expected.

“Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending are also starting to provide more support to spending. There have been some early signs of an improvement in labour market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.” Mr. Stevens said.

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The reorganisation “has a lot of momentum; you will see it in the results”, Mrs. Kelly said in an interview with The Australian

Westpac launched an initiative over the weekend called the bank manager project, part of the lenders strategy of focusing on customers.

The aim of the initiative is to reprise the bank manager’s role as an accessible executive with enough seniority to make decisions on behalf of the bank.

The project is as a result of surveys which show that as many as 70 per cent of people were unhappy with impersonal services from banks.

Westpac has invested tens of millions of dollars refurbishing as many as 250 of its branches, as well as the recruiting and training of managers for 60 per cent of the lenders 700 branches.

Westpac head of retail and business banking Peter Hanlon said that the lender had added 900 people to its branch network over the last 12 months.

Westpac has set the ambitious goal of having 14,000 of its staff members, including the chief executive and senior management team, having some kind of communication with the bank’s 4.5 million retail and business customers. The communication will be either face to face, over the phone or written, and will occur over the next few months.

It is a major undertaking by Westpac, and part of Mrs. Kelly’s desire to shed the bank’s product-driven approach, and “put the customer at the centre of everything we do”.

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“Internationally they could play quite a big role and I guess that depends on the individual appetite of each bank to move internationally. Certainly within our own case I hope to be substantially bigger in a couple of years’ time.” Mr. Smith told Sky Business.

ANZ is already the largest Australian lender in Asia, and of the Big Four, possesses the largest acquisition war chest.

Speaking to ABC, Mr. Smith said he worried that the bank strong capital position would weaken its return on equity, though he did add that having a strong capital position was preferable to having one which could be perceived as being weak.

“But I’d rather be too strong than too weak right now,” he said. “I think that the situation is still uncertain and it provides us with huge opportunity both for organic growth but also for any acquisition that may come along opportunistically.”

Mr. Smith said that whilst he was considering whether to return some of the capital ANZ was sitting on to its shareholders, he was also on the lookout further acquisition opportunities in Asia that could be used to deploy some of the excess capital.

“I think we need to build up our institutional business a little bit more (in Asia), gradually get into the middle market … and then build our wealth and the high-end retail,” he told the ABC.

Mr. Smith’s ambition is to turn ANZ into a super-regional lender that delivers 20 per cent of its earnings internationally within two years. He believes that the US and European financial systems are still at risk of further shocks, which may produce additional acquisition opportunities for ANZ, as distressed lenders divest assets and focus on their core businesses instead.

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Only 71.7 per cent of customers said they were satisfied with the service they received from the banking majors including ANZ, Westpac, Commonwealth and National Australia Bank, according to Roy Morgan Research.

ANZ’s customer base enjoyed the most satisfaction amongst the Big Four, whilst NAB customers recorded the least, although the difference was small.

Earlier in the month, a study by market research firm Infochoice suggested Australians could save $6.1 billion a year in bank costs, simply by switching from the Big Four to smaller regional banks who offer cheaper services.

Building societies achieved the highest consumer satisfaction ratings (87.9 per cent) according to the Roy Morgan research. Credit unions received the second highest approval rating with 86 per cent.

International lenders also bested the Big Four in terms of consumer satisfaction, with ING recording 84.2 per cent customer satisfaction ratio.

The research comes as banks  risk earning the ire of their customers after the big four all increased fixed rates on home loans in the past week ahead of an expected decision by the Reserve Bank of Australia next week to lift the official cash rate for a second straight month.

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