Reserve Bank of Australia Annual Report – 1999 The Bank's Earnings

Earnings available for distribution to the Government come from two principal sources – underlying earnings, and the gains or losses which come from realised valuation changes in the Bank's portfolio. Taken together, these two components are available to vary reserve holdings and for distribution to the Government. This procedure – whereby only realised profits are available for distribution – is in accordance with the Reserve Bank Act and widely accepted central bank practices.

Underlying earnings are dominated by net interest income on the Reserve Bank's portfolio. The Bank does not pay interest on around three-quarters of its liabilities. The largest such liability is the note issue, but others include capital, reserves and, until recently, non-callable deposits. On the assets side, interest income is received from government securities, both domestic and foreign. The Bank also receives some non-interest income (e.g. banking service fees, numismatic and other note sales) and must meet its expenses. Underlying earnings, the net outcome of these influences, tend to be relatively steady from year to year, varying slightly with interest rates and the size of the balance sheet. It is worth noting, however, that the abolition of non-callable deposits from 1 July 1999 will mean that the Bank's underlying earnings will be around $250 million lower in 1999/2000 and thereafter.

Sources of earnings available for distribution
($ million)
Underlying earnings Realised gains and losses Earnings available for distribution
1989/90 1,248 −153* 1,095
1990/91 1,322 391 1,713
1991/92 1,516 1,038 2,554
1992/93 1,760 2,803 4,563
1993/94 1,556 −48* 1,508
1994/95 1,649 123 1,772
1995/96 1,784 702* 2,486
1996/97 1,715 1,990 3,705
1997/98 1,750 1,524 3,274
1998/99 1,816 1,860* 3,676
* Includes unrealised losses in excess of previous years' unrealised gains held in reserves.

In 1998/99, underlying earnings were $1,816 million, up from $1,750 million in the previous year. Major factors which have enhanced underlying earnings are increased income from growth in the domestic portfolio; a reduction in the interest cost of deposit liabilities; write-down of notes on issue; and a lower level of staff costs and other expenses. The main offsetting factor was lower returns on foreign currency assets because of lower average interest rates.

Realised gains arise when domestic or foreign securities are sold for more than their original purchase price. Sales of foreign currency made in the course of changing the composition of the Bank's foreign currency portfolio and the roll-over of foreign exchange swaps resulted in realised valuation gains during the year. Some of these swaps had been entered into at the time of the intervention in the foreign exchange market during the middle of last calendar year. In 1998/99, realised gains were $2.3 billion, the highest since 1992/93. It is also in accordance with central bank practices that unrealised losses through marking to market of the Bank's portfolio reduce the amount available for distribution, except to the extent that there are reserves which were built up from earlier unrealised gains, which can be used to offset these unrealised losses. Unrealised losses on marking to market in the current year were around $1.7 billion. After allowing for balances in the unrealised profits reserve available as a partial offset, unrealised losses reduced earnings available for distribution by $424 million in 1998/99.

Realised gains on gold sales boosted earnings in 1996/97 (by $1,637 million), and in 1997/98 ($548 million) when some gold sold earlier was delivered and the proceeds received. Such sales were not, of course, a factor in 1998/99.

Reserve Bank payments to Government
($ million)
Earnings available for distribution Transfers to reserves Balance
available for
Final payment from previous year Interim
payment from
current year
Total payment
1989/90 1,095 520 575 140 300 440
1990/91 1,713 210 1,503 275 400 675
1991/92 2,554 200 2,354 1,103 400 1,503
1992/93 4,563 750 3,813 1,954 600 2,554
1993/94 1,508 1,508 3,213 3,213
1994/95 1,772 1,772 1,508 200 1,708
1995/96 2,486 150 2,336 1,572 200 1,772
1996/97 3,705 2,005 1,700 2,136 2,136
1997/98 3,274 548 2,726 1,700 1,700
1998/99 3,676 3,676 2,726 2,726
1999/2000* 3,000 3,000
* A second tranche of $676 million will be paid in 2000/01

The Reserve Bank's earnings available for distribution are paid to the Commonwealth Government, after any transfers to the two reserve funds the Bank maintains to deal with contingencies. Reserves had been increased over the previous two years when, with the approval of the Treasurer, the proceeds of gold sales totalling $2,185 million were transferred to them. In view of this, no additions were made to these reserve funds from 1998/99 earnings and the full amount of $3,676 million was available for payment to the Government. This will be paid in two tranches: the first, of $3,000 million, will be paid in August 1999; and the balance of $676 million will be paid in July 2000.

Following changes introduced in 1998 and explained in last year's Annual Report, the Bank's accounting profit is calculated according to general accounting principles, in which all valuation changes resulting from marking to market the Bank's portfolio during the year – whether realised or unrealised – are brought into the profit and loss account. The appreciation of the Australian dollar over the course of the year meant that the Bank's foreign exchange holdings are worth less in Australian dollars, while higher interest rates were associated with a fall in the value of its government security portfolio. These valuation changes were partially offset by gains realised during the year of around $1.2 billion which arose mainly from foreign exchange swap transactions; after allowing for these, there was a net $490 million loss on investments. This, combined with the underlying profit of $1,816 million, resulted in an accounting profit of $1,326 million.

The Reserve Bank's 1998/99 Financial Statements are presented in the following pages.