Banks: Aust. Banks, Market Weaken On Fears, Again

A couple of times this year we have carried reports of comments from senior Reserve Bank officials which have questioned the sustainability of Australian bank earnings.

At the weekend we had those comments confirmed at the highest level in the annual report of the Bank of International Settlements, the central bank to most of the world's central banks.

The news came at the same time as a study from Goldman Sachs seems to support the idea that banks can continue paying high dividends over the next few years.

As well there are heightened worries that a possible default by Greece might trigger another global financial crisis.

As a result in yesterday's gloomy markets, the banks generally suffered.

ANZ shares fell 23 cents, or 1.1% to $21.24, Commonwealth Bank shares down 68 cents, or 1.3% to $50.45. Westpac shares lost 8c at $21.29 and National Australia Bank shares were 16 cents, or 0.6%, weaker at $24.50.

The overall market was off 1% here yesterday and the Australian dollar dropped to its lowest level in 11 weeks.

The dollar slumped as low as $US1.0412 as interbank futures moved to almost full price in the chance of a 0.25% rate cut by year-end.

In late afternoon trade, the dollar was buying $US1.0423. The currency traded at $US1.0443 in New York Tuesday morning.

The low in April was $US1.0390 (on April 12) and the currency has now fallen more than 5% from a 29-year post float peak of $US1.1012 on May 2.

News of a possible deal involving French banks and Greek debt turned sentiment and Wall Street jumped by more than 100 points on the Dow.

Analysts say there will be no direct impact on Australian banks from a Greek default because there is no exposure, but there could very well be a repeat of late 2008, after the Lehman Brothers failure when banks stopped lending to each other and hunkered down, forcing up the cost of funds here and offshore.

That is seen as a problem and why investors have become nervous about warnings from regulators, as we saw at the weekend in the Bank of International Settlements Annual Report and Annual Meeting.

Local regulators have been warning for most of this year that the banks face a tougher few years for a number of reasons.

RBA Assistant Governor Guy Debelle first questioned the outlook for banks in a speech last November, and then provided more detailed commentary in another public appearance in March.

And comments from Governor Glenn Stevens and his deputy, Ric Battellino have also pointed out how the higher rate of savings by consumers especially was impacting business, such as banks and retailers.

The bottom line was that our banks face some years of high deposit growth that could at times outstrip lending growth, while the banks will be required to add more capital to their balance sheets.

The impact of the extra capital needs has been mentioned several times by RBA officials as well, and at the weekend, was singled out by the head of the Bank of International Settlements (BIS) at its annual meeting in Basel, Switzerland.

It's a case of the need for greater prudence and safety meet the reality of the post GFC world, especially in advanced economies where consumers and many businesses cut their debt and become more risk averse, putting money into bank deposits instead of shares or deals.

The BIS said in its annual report that investors should prepare themselves for smaller profit margins as banks stash away more capital to avoid another global financial crisis, the world's major central bankers cautioned.

The Bank for International Settlements said new rules for banks to gradually increase their capital cushions would likely result in more predictable and smaller returns.

In his speech, Jamie Caurana, BIS General Manager, said

"Elements of global finance are prolonging financial fragilities: these include not only low policy rates and expectations of continued official support, but also high expectations of returns on bank equity. Investors need to lower their expectations of such returns in accord with lower bank leverage."

These comments echo the substance and tone of the comments from the RBA's Guy Debelle in a speech in March : "banks have experienced a slowdown in asset growth and have funded the assets with a greater share of deposits.

"A consequence of this is that wholesale debt issuance by financial institutions has declined to its slowest pace since the mid 1990s.

"The most pronounced slowing has been in the issuance of short-term debt as banks have sought to lengthen the average maturity of their funding by increasing the share of long-term debt in total funding

"There are reasonable grounds to expect these trends may be sustained for some period to come. In particular, if one thinks about the composition of growth in Australia in the period ahead, it is likely to be investment-intensive.

"But much of that investment is likely to be funded by companies which are cash-rich or tap global capital markets directly.

"This means that the growth in the economy in the period ahead may be associated with less growth in business credit than has been the case in the past. It is also likely to boost deposit growth.

"So banks may be seeing a prolonged period of faster deposit growth but slower asset growth."

The whole idea will be to make the banks safer and less exposed to dangerous offshore events, as we saw during the GFC.

Even the Big Four Australian banks, face several years of downward pressure on margins from the pressures on profit margins from the higher capital requirements and sluggish growth in lending, overlaid with the return to saving (rather than consumption) by Australian consumers.

Over the past couple of weeks the latest consumer sentiment survey from Westpac and the Melbourne Institute and then the Institute's survey of how Australians see their financial standing, have both pointed to the higher importance consumers are giving to saving in banks, and not investing in shares, such as bank shares.