AGMs: Westpac Line On Funding, Rates

It's a difficult task being the CEO of a big Australian bank: they have to sound concerned, informed and above all authoritative, as we saw with Westpac's Gail Kelly yesterday, and will hear from the NAB's Cameron Clyne later today and from the ANZ's Mike Smith tomorrow.

And occasionally they have to sell a difficult cause or case to the market, shareholders and customers, such as interest rates, the toughest of all.

Yes, it's annual meeting time for the three September 30 balancing mega banks.

Coming only a week after the 'will they, they won't, they will' on passing on interest rate cuts from the Reserve Bank that lasted two days, shareholders will have had their chance to quiz the CEOs and their boards on this question and others by the close of business on Friday.

Westpac kicked off the trio's annual ritual and CEO Kelly looked overseas in her senior banker role, looking to avoid the issue last week of the rate cut, preferring to approach that tricky issue by talking about the impact of the eurozone's crisis on funding costs and the bank's profit margins.

In adopting that tack, Ms Kelly is telling shareholders and customers two things: to shareholders it's that profit growth (and therefore dividend growth) will get harder in the next year as profits are compressed, and to customers, it's don't expect any further rate cuts to be passed on in full.

She forgot one of the other reasons why profit margins are under pressure: lending growth remains weak because businesses aren't borrowing as much, and consumers aren't spending as much on their credit cards or spending differently.

And housing loan growth remains at multi year lows, compared to the higher levels of four years ago and earlier.

And Australian consumers are saving more, and the banks are having to maintain fairly generous deposit rates (compared to what they have offered before the GFC) to attract and hold that money, which has helped banks cut the amount of funds they have to raise offshore (at a rising cost, and more limited availability).

In fact the surge in domestic savings (running at 10%) and low demand for loans, have allowed the banks to build up their deposit cushions even faster, allowing further cuts in offshore borrowing at a time when the eurozone is making it tougher and more expensive.

The Reserve Bank's Deputy Governor Ric Battellino told a Sydney conference yesterday that bank deposits had risen 9% in the past year.

That's more than twice as fast as the 3.5% growth in total lending in the economy in the year to October 30.

He said that, "it has been more than sufficient to fund the increase in banks' lending". And that's a point to remember when listening to comments from bank leaders at AGMs.

So it's against that background that Ms Kelly told the AGM yesterday that higher funding costs will put pressure on margins and Westpac needed to balance economic realities before passing on central bank interest rate cuts to customers.

She told the meeting that the crisis in Europe has slowed growth, made customers cautious and hurt revenue in its markets and treasury business.

"Higher funding costs are a reality of this environment and are continuing to place pressure on interest margins," she said.

"We are very mindful of the impacts of interest rate decisions on customers but these must be balanced with what is economically responsible."

Westpac has passed on the last two central bank rate cuts in full to customers, joining its rivals in doing so after a two-day delay last week.

Westpac shares fell 50c at one stage, but recovered in the afternoon to end down just 3c at $20.80.

"Similar to the global financial crisis, the problems in Europe are reverberating around the globe with growth slowing, increased financial market volatility and heightened consumer and business uncertainty," Kelly said.

But she added that Australia "is in a strong position" because it hasn't gorged on debt like some other developed nations and has a strong banking sector that's well regulated.

"We are further supported with significant monetary policy flexibility," Kelly said, (referring to the two recent cuts in rates by the RBA in response to what is happening offshore in Europe).

"In the early part of our 2012 year, we continue to see the benefits of our approach with increasing cross-sell of wealth products and strong balance sheet management, including good growth in customer deposits.

"However, following on from our experience in the latter months of our 2011 financial year, global uncertainty and the associated market volatility continue to weigh on revenues from our Markets and Treasury businesses including the negative revaluation of our liquid assets."

She said that if economic conditions in Europe remain difficult or worsen, the fallout will continue to hit Australia's banking system.

"This will directly affect the price, and potentially the availability of credit," she said.

Retiring Wetspac chairman Ted Evans underscored the point by telling shareholders that domestic interest rates will be set by the market rather than the central bank.

"Interest charged on loans and paid on deposits by Australian financial institutions - banks and others - will be determined by competition amongst them," he said.

Mr Evans has been Westpac's chairman for four years and will be succeeded by Lindsay Maxsted.

Mr Evans, a former head of Federal Treasury, also suggested the Federal government should stop jawboning the sector especially as turmoil remains in global finance markets.

"Australian governments must allow our institutions of strength - not least the banking system - the flexibility needed to adapt to a changing world."

He said that, "With a further strengthened balance sheet, market leading asset quality and provisioning, and a more customer-centric culture; Westpac is well placed to continue delivering high quality returns for shareholders".