“There is just a world of difference between the situation in Australia and the situation in Europe and the United States.” That’s the assessment offered by federal Treasurer Wayne Swan early in the day’s trading on Friday, Aug. 5, when the Australian share market followed through with its own swan dive after Western equity markets plunged the preceding day.

In his remarks Mr. Swan also noted a structural change that’s causing difficulty for critical segments of the domestic economy, primarily retail, tourism, education and manufacturing, which are suffering the impact of a stronger currency. Australians are reining in their spending, as home prices have cooled. Devastating floods in Queensland have also had a lingering impact, putting another drag on confidence.

The Australian economy contracted by 1.2 percent in the first quarter of 2011. The International Monetary Fund (IMF) revised downward its estimate for GDP growth Down Under in 2011, to 2 percent. The RBA followed suit this week, changing its expansion estimate to 2 percent from 3.25 percent. The RBA, the first developed central bank to boost interest rates following the global consensus on monetary policy occasioned by the financial crisis, held its target overnight rate at 4.75 percent this week, among the highest in the world.

Retail sales for June fell 0.1 percent from May’s levels against a forecast of growth of about 0.2 percent. Sales in May were down 0.6 percent from April. Annual retail sales total AUD240 billion and account for a fifth of Australian GDP. A lot of people work in the sector, and it remains an important barometer of domestic economic conditions.

Here’s what the RBA had to say in its statement revealing the downward GDP revision and its interest rate decision:

Growth over 2011 has been revised downwards due to a slower than expected recovery in coal production and to a lesser extent a downward revision to consumer spending as domestic and international concerns have weighed on sentiment.

The medium-term outlook continues to be characterised by the significant pipeline of resource sector investment with a number of large projects already underway and by strong growth in resource exports.

There is a large divergence between the mining and related sectors and the rest of the economy with the cautious behaviour of households, the unwinding of the fiscal stimulus and the high exchange rate weighing on a number of industries.

Although the mining boom remains in full force, growth in non-mining sectors has slowed. World growth is weaker, and overall risks have certainly increased in recent days. But Australia’s economy will continue to ride unprecedented demand from Asia for its natural resources. But the situation is becoming more complicated, as inflation is rising at a pace outside the RBA’s target range. Meanwhile Australia’s trade surplus hit a record AUD22.5 billion  in the 12 months ended Jun. 30, as exports surged 17 percent to AUD298 billion. Iron ore, coal and agricultural exports. Exports to China and Japan, Australia’s top trading partners, rose 39 and 26 percent respectively. Australia’s terms of trade, a measure of export prices relative to import prices, are at a 140-year high.

Trade with Asia helped Australia avoid the Great Recession, and it’s ready to benefit from a huge amount of spending coming from China. As is the case with Canada, demand for its resources has driven a rally in the Australian dollar (the “aussie”).  The Australian resources industry is riding a similar wave of high commodity prices that’s boosted Canada’s national wealth.

And there are roughly USD400 billion in new resource extraction projects planned in Australia over the next five years. Western Australia leads the way with USD242 billion in planned resource and infrastructure projects, with approximately half of that spending concentrated in mining, particularly iron ore. There are a lot of natural gas projects as well. Western Australia will have to support population growth, as mining and construction will need an additional 260,000 workers over the next five years, according to government estimates.

Although there are certainly headwinds, unemployment is low, as is public debt. And the nation’s financial system is also in relatively strong shape.

The Financial System’s Four Pillars

The Australian banking system is dominated by four institutions that are constrained by an unofficial government policy that prevents them from merging with one another. There are no impediments to entry into the Australian banking system, but the government does hope to preserve domestic competition by limiting potential scale.

The policy is the subject of continuous debate, as the “Four Pillars” themselves argue that this ostensible state sanction also inhibits their ability to compete on a global scale. Other critics charge that the setup allows the four to collude on interest rates and engage in other anticompetitive behavior. From an outsider’s perspective it’s impossible to overlook the fact that Australia’s banks have to date avoided the kind of turmoil that wracked major banks in other developed countries.

In fact all four–Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CMWAY, CBAUF), the largest with a market cap of AUD72.1 billion, Westpac Banking Corp (ASX: WBC, NYSE: WBK), the second-largest with a AUD58.4 billion market cap, Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANZBY, ANEWF), No. 3 at AUD50.2 billion, and National Australia Bank Ltd (ASX: NAB, OTC: NABZY, NAUBF), No. 4 at AUD47.9 billion were ranked among Global Finance magazine’s “World’s Safest Banks” for 2010.

The recent selloff–retail banks have been some of the worst performers in the Australian market over the past month–has left all four at 52-week lows as of Friday morning.

Weak credit growth and concerns about how Australia’s four major banks fund their operations have pulled the domestic sector to a 7.6 percent decline over the past month, while the broader S&P/Australia Securities Exchange 200 Index has fallen 5.5 percent over the same time frame. Banks have been operating in a weakening economic environment, as revealed by the first-quarter GDP number and recent retail sales figures.

This concern over loan growth may be overstated, however, as efforts in the aftermath of the global financial crisis to strengthen balance sheets, reduce reliance on wholesale funding and boost deposits are bearing fruit. Lower loan growth could therefore be more manageable for the group.

Australian banks are also relatively high-yielding stocks, with an average of about 7 percent. Investors want cash flow, and Australia’s Big Four provide it.

Commonwealth Bank, like its domestic peers, provides a full range of financial services to personal and business clients, including traditional retail banking, insurance, superannuation, which is the generic term used to describe Australia’s national public pension system, and stock brokering as well as international financing and institutional banking.

Commonwealth will provide a third-quarter “trading update”–a summary of operating results for the three months ended Jun. 30–on Aug. 10. The consensus expectation is that loan provisions will decline once again, to represent about 23 basis points worth of “gross loans and advances,” or GLA.

On another positive note, Commonwealth is funding loan growth with household and business deposit growth rather than through higher-cost wholesale funding channels. But loan growth is stagnating, and management’s approach–adding branches in countries it already operates in, such as Indonesia, doesn’t present the upside potential that its peers have found with their respective efforts to add assets.

Commonwealth Bank trades as a sponsored American Depositary Receipt in the US under the symbol CMWAY. Now priced to yield 5.6 percent, Commonwealth Bank of Australia is a buy up to USD50.

Australia & New Zealand Banking Group Ltd’s (ASX: ANZ, OTC: ANZBY, ANEWF) primary competitive advantage is its domestic net funding surplus, which means it doesn’t have to absorb the additional operating costs that come with accessing wholesale funding markets. Australian retail and commercial banking is the group’s major operation, but it also runs the largest domestic bank in New Zealand.

New Zealand’s economy, like Australia’s, is resource-focused; Kiwis enjoy extremely low unemployment, too, and growth there is forecast to be among the strongest in the world in 2011. ANZ operates in 25 other countries around the world, including China, Vietnam and Indonesia. The group also provides financial services in the Middle East, Europe and the US.

The third-largest of Australia’s banks, ANZ–as it’s popularly known–is full bore into a “no frills” program of dispensing of financial advice, selling “superannuation” and insurance products to retail customers via the telephone. The program has helped the bank boost its deposit funding over the last 12 months.

Housing loan growth has been roughly in line with consensus expectation of 5 percent, though business loan growth has stalled a bit. Bad loans should amount to about 32 basis points worth of GLA, suggesting, like Commonwealth Bank, that it’s reached the low for the cycle and will no longer have the benefit of reduced provisions flowing to the bottom line. ANZ tightened lending standards early in 2011, perhaps too much if you’re interest is purely adding assets. If you’re interested in asset quality it’s a positive, though some effort at moderation might find a better growth balance.

Better international growth prospects than its peers and a similarly solid capital position make Australia & New Zealand Banking Group, which will provide a third-quarter trading update Aug. 19, and its 6.8 percent yield a buy up to USD22. ANZ also sponsors an ADR in the US.

National Australia Bank is No. 4 in terms of market capitalization, and a projected net funding gap for the three months ended Jun. 30 of AUD11 billion puts it at a distinct disadvantage when it comes to operating costs relative to its peers. Bad loans should account for 35 basis points of GLA, which leaves some room for improvement.

 Double-digit housing loan growth and on-track business loan growth are strong positives, but National Australia is the weakest of Australia’s Four Pillars in terms of capital positions. Though it’s on track to meet stricter Basel III international standards, the bank’s Core Tier 1 Capital Ratio is lowest among its peers.

Analyst concern focuses on National Australia’s expansion in the mortgage market, which could jeopardize its future. Aggressive push has raised its “funding gap” to AUD83.2 billion, which means it has to make use of wholesale funding markets more than its peers. On the other hand, this expansion should fuel above-peer earnings growth in 2011. National Australia is on pace for 20 percent growth, while ANZ and Commonwealth project for double-digit improvement.

Buy National Australia Bank and lock in a near 8 percent yield up to USD25.

Westpac Banking Group’s net funding deficit forces it to play in wholesale funding markets to cover loan growth, too. The gap is on course to reach AUD3.2 billion for the three months ended Jun. 30. Housing loan growth is in line with expectations of about 5 percent, though business loan growth is trailing expectations of 4 percent.

Westpac’s focused cost management, peer-leading efficiency ratio (41 percent) and lowest expenses-on-assets ratio recommend it to conservative investors. It’s well positioned with capital and franking credits. But continued engagement with the funding market because of its substantially above peer loan-to-deposit ratio (173 percent compared to a group average of 159 percent) make it hard to see where the bottom-line growth comes from, especially if the global economy recovers and the RBA re-focuses on monetary tightening.

On top of that 60 percent of Westpac’s loan book is tied to domestic mortgages, and provisions are probably near cycle lows. It’s hard to find earnings growth there. But after this violent, overdone selloff Westpac Banking Group’s New York Stock Exchange-listed ADR is yield more than 8 percent. Use this unique opportunity to lock up a quality company in a key global market. Buy Westpac Banking Group up to USD100.