By Ross Kelly
SYDNEY--Australia's banks may have emerged from the global
financial crisis with barely a scratch, but their latest bumper
profits shouldn't necessarily be taken as a sign that all is well
Down Under.
The biggest danger for the likes of Commonwealth Bank of
Australia and Westpac Banking Corp. is consumer confidence that's
sinking as the country's decadelong mining boom cools and amid
signs of a further slowdown in China, its biggest trading
partner.
Such fears have made the nation's traditionally conservative
bank customers even more likely to horde their cash, and less
willing to take out loans--even after the central bank cut interest
rates to a fresh record low of 2.5% this month.
That doesn't bode well for the so-called big-four
lenders--including Australia & New Zealand Banking Group and
National Australia Bank, whose earnings growth now relies on people
having the confidence to borrow more aggressively.
"It's going to get tougher from here," said Graeme Petroni, a
banking analyst at BT Investment Management, which manages around
$50 billion in client funds. "The earnings impetus has slowed and
the same's true on the dividend side."
Australia's banks became darlings of the industry as the global
financial crisis spread in late 2008 and ate up several big names
across the sector. Thanks to prudent lending practices, they were
able to limit their exposure to the types of toxic loans that
brought down Lehman Brothers Inc. and other large overseas
financial institutions.
The big four managed to maintain their AA credit ratings even
while many banks in Europe and the U.S. had theirs heavily
chopped.
Since the financial crisis, the biggest banks have reported a
steady stream of record earnings on the back of Australia's buoyant
economy that's notched up more than two decades of straight growth,
fueled by industrializing Asia's demand for the country's raw
materials.
As that demand has cooled in recent months, Australia's lenders
have looked for alternative ways to boost their profit, and support
share prices still mostly hovering near record highs. Many have
scrambled to shave costs by transferring administrative roles
abroad, while hunting for new sources of income by stepping up
their push into mainland Asia.
But with the fruits of previous cost savings embedded in their
latest earnings, the search for further fat to trim is likely to
get less productive and more desperate.
Some of the banks have welcomed the trend of falling bad debt
charges across the industry as cautious customers spurn riskier
credit. Still, that may offer little more than temporary comfort
since future earnings will now be measured against a lower base of
sour loans.
National Australia Bank Ltd. (NAB.AU), the most
business-customer focused of the big four, this week rounded out
another record reporting season for the nation's lenders with
third-quarter net profit of 1.70 billion Australian dollars
(US$1.37 billion), up 40% from a year earlier.
Last week, Commonwealth Bank of Australia, the nation's largest
lender by market value, said cash profit--a measure that excludes
unusual items--rose 10% to a record A$7.82 billion in the year
through June. At Australia & New Zealand Banking Group Ltd.,
cash profit in the nine months through June jumped 11% to A$4.8
billion.
"Earnings appear to be more optimized than ever at this
juncture, leaving limited scope for positive earnings surprises
near term," Credit Suisse analysts said in a note to clients last
week.
National Australia Bank's strong profit rise was supported by
gains linked to its hedging against fluctuations in interest rates
and currencies. The lender also got a sugar hit from lower bad-debt
costs at its ailing U.K. operations.
Commonwealth Bank's chief executive, Ian Narev, said Australia's
economy was "fine," but then spooked the market by saying he took a
"conservative" view of the country's future amid slowing Chinese
demand for its commodities. In another ominous sign, ANZ, the most
advanced in its Asia strategy, said margins at those overseas
operations, which account for about a fifth of the lender's
revenue, were shrinking.
Angus Gluskie, Sydney-based managing director of White Funds
Management, said the banks often play down the prospect of making
higher profits because they don't want politicians to hit them with
increased levies or limit their pricing power.
"Nevertheless, we remain in an environment where the banks are
likely to experience low rates of loan growth relative to history,"
Mr. Gluskie said.
Australian banks have largely shielded themselves from potential
credit-rating downgrades by boosting their deposit funding, while
Europe's easing debt woes have lowered wholesale funding costs.
An outcome to Australian national elections next month should
remove some political uncertainty and support consumer confidence.
It's also widely anticipated that China will experience a soft
landing, and that record-low interest rates in Australia will
breathe some life into the housing market.
Even so, BT Investment's Mr. Petroni said it was unlikely that
demand for credit would gather much steam in the coming period.
"Regulators won't let house prices race away, households are
still needing to reduce debt, and whoever steps into power still
has budget pressures to handle," he said. "It's hard to see general
confidence coming to save the banks."
Write to Ross Kelly at ross.kelly@wsj.com
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