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192069
Thu, 06/30/2011 - 14:39
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http://m.oananews.org//node/192069
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Banks to cut costs to maintain profits
SYDNEY (AAP) - June 30 - Australia's big four banks will be forced to cut costs if they want to maintain their record profits.
That's because they face a tough year of slower lending growth and increasing bad debts in a weakening economy.
Half of the big four's 8.3 per cent profit growth for the first half of fiscal 2011 was driven by big falls in bad debts, which had cut profits two years before during the global financial crisis.
But analysts say that trend could reverse as more and more home and business borrowers fall behind on repayments because of rising interest rates.
The number of borrowers who fall behind or fail to make repayments on credit cards and loans typically rise three years after a financial crisis as interest rates climb, Southern Cross Equities' TS Lim says.
The banks are also unable to rely on a previously expected rise in lending, with home loan growth at a 20-year low and business lending actually falling.
So banks will be relying on heavy cost cutting, on top of cuts that have already taken place, even to keep profits where they are.
That's left the market wondering where future earnings will come from in the next six months, with many analysts reducing their ratings on bank stocks.
"Economic conditions are not necessarily improving to the extent we'd hoped ... and a lot of expectations around volume growth are not necessarily coming through," Nomura Australia analyst Victor German said.
In late 2010, banks said they expected better loan growth would come in 2011, but that didn't eventuate, leaving home lending growth at a 20 year-low of six per cent.
The "Green shoots", or early signs, of a recovery in business loan growth was spotted by National Australia Bank (NAB) - Australia's biggest business bank - and Commonwealth Bank in the three months to March 2011. ANZ and Westpac round out the big four banks.
But in April, business loans declined by 0.6 per cent, underlining the fragility of the economic recovery, Morgan Stanley analyst Richard Wiles said.
Over the last two decades, bank profits surged on lending growth that was higher than 10 per cent a year, strong investment markets and overseas investors who were willing to lend them money at low interest rates.
That all changed during the global financial crisis, leaving cost cutting as the only path to higher earnings.
"Banks are not necessarily positioned for a lower growth environment and they will continue to focus on costs in the medium term," Mr German says.
Employee costs make up about 58 per cent of the banks' total costs, after they added about 41,000 people, or 29 per cent, to the 141,000 already employed by the big four and regional banks at the time, UBS analyst Jonathan Mott estimates.
Despite Westpac and ANZ's recent decision to send up to 250 jobs offshore to India and other Asian countries, analysts think banks will opt to reduce headcount by as people leave, rather than mass redundancies.
"We believe that much of the reduction in staff headcount may be achieved by natural attrition," Mr Mott said.
But there is a reason to buy bank stocks, as the dividends they pay are quite attractive because of recent falls in the share price.
The yield, the value of dividends in a year compared with the share price, for banks is over seven per cent, when tax benefits are included. That's 2.4 per cent above the average yield for industrial stocks, according to Deutsche Bank's James Freeman.
NAB's cheap share price, market share gains and business banking focus make it the favourite among analysts.
Another thing that is helping the banks is the increase in deposits as more people save, which now make up 60 per cent of the money the banks lend. Banks are also facing lower competition for deposits which means they are paying less in interest to customers.
That allows the banks to borrow less from overseas investors in wholesale credit markets.
But banks still borrow enough from overseas to make it a worry, with ratings agency Standard & Poor's viewing their reliance on those markets as a "soft spot" that needs close monitoring.
That was unlikely to cause S&P to cut the big four banks' double-A credit rating, a measure investors use to judge the safety of a borrower.
The Reserve Bank of Australia also has confidence in the local banks, with assistant governor Guy Debelle saying that they are less vulnerable to global financial shocks than during the 2008 credit crisis.
He added that the Reserve Bank could bail them out more easily than its overseas counterparts if another crisis struck, because most Australian bank borrowing was in Australian dollars.
Additionally, interest rates in overseas markets are now less likely to suddenly rise after Greece's parliament approved budget cost cutting measures in exchange for a 28.4 billion euros ($A38.93 billion) payment from the European Union and International Monetary Fund.
So far, Europe's debt crisis has not caused interest rates to rise substantially for NAB, chief executive Cameron Clyne told a business lunch on Tuesday.
Local banks had very little to no direct dealings in Greece, but a default by Greece or another European country could cause interest rates to rise across the board as lenders worried that they're money was at risk of not being repaid.
That's because they face a tough year of slower lending growth and increasing bad debts in a weakening economy.
Half of the big four's 8.3 per cent profit growth for the first half of fiscal 2011 was driven by big falls in bad debts, which had cut profits two years before during the global financial crisis.
But analysts say that trend could reverse as more and more home and business borrowers fall behind on repayments because of rising interest rates.
The number of borrowers who fall behind or fail to make repayments on credit cards and loans typically rise three years after a financial crisis as interest rates climb, Southern Cross Equities' TS Lim says.
The banks are also unable to rely on a previously expected rise in lending, with home loan growth at a 20-year low and business lending actually falling.
So banks will be relying on heavy cost cutting, on top of cuts that have already taken place, even to keep profits where they are.
That's left the market wondering where future earnings will come from in the next six months, with many analysts reducing their ratings on bank stocks.
"Economic conditions are not necessarily improving to the extent we'd hoped ... and a lot of expectations around volume growth are not necessarily coming through," Nomura Australia analyst Victor German said.
In late 2010, banks said they expected better loan growth would come in 2011, but that didn't eventuate, leaving home lending growth at a 20 year-low of six per cent.
The "Green shoots", or early signs, of a recovery in business loan growth was spotted by National Australia Bank (NAB) - Australia's biggest business bank - and Commonwealth Bank in the three months to March 2011. ANZ and Westpac round out the big four banks.
But in April, business loans declined by 0.6 per cent, underlining the fragility of the economic recovery, Morgan Stanley analyst Richard Wiles said.
Over the last two decades, bank profits surged on lending growth that was higher than 10 per cent a year, strong investment markets and overseas investors who were willing to lend them money at low interest rates.
That all changed during the global financial crisis, leaving cost cutting as the only path to higher earnings.
"Banks are not necessarily positioned for a lower growth environment and they will continue to focus on costs in the medium term," Mr German says.
Employee costs make up about 58 per cent of the banks' total costs, after they added about 41,000 people, or 29 per cent, to the 141,000 already employed by the big four and regional banks at the time, UBS analyst Jonathan Mott estimates.
Despite Westpac and ANZ's recent decision to send up to 250 jobs offshore to India and other Asian countries, analysts think banks will opt to reduce headcount by as people leave, rather than mass redundancies.
"We believe that much of the reduction in staff headcount may be achieved by natural attrition," Mr Mott said.
But there is a reason to buy bank stocks, as the dividends they pay are quite attractive because of recent falls in the share price.
The yield, the value of dividends in a year compared with the share price, for banks is over seven per cent, when tax benefits are included. That's 2.4 per cent above the average yield for industrial stocks, according to Deutsche Bank's James Freeman.
NAB's cheap share price, market share gains and business banking focus make it the favourite among analysts.
Another thing that is helping the banks is the increase in deposits as more people save, which now make up 60 per cent of the money the banks lend. Banks are also facing lower competition for deposits which means they are paying less in interest to customers.
That allows the banks to borrow less from overseas investors in wholesale credit markets.
But banks still borrow enough from overseas to make it a worry, with ratings agency Standard & Poor's viewing their reliance on those markets as a "soft spot" that needs close monitoring.
That was unlikely to cause S&P to cut the big four banks' double-A credit rating, a measure investors use to judge the safety of a borrower.
The Reserve Bank of Australia also has confidence in the local banks, with assistant governor Guy Debelle saying that they are less vulnerable to global financial shocks than during the 2008 credit crisis.
He added that the Reserve Bank could bail them out more easily than its overseas counterparts if another crisis struck, because most Australian bank borrowing was in Australian dollars.
Additionally, interest rates in overseas markets are now less likely to suddenly rise after Greece's parliament approved budget cost cutting measures in exchange for a 28.4 billion euros ($A38.93 billion) payment from the European Union and International Monetary Fund.
So far, Europe's debt crisis has not caused interest rates to rise substantially for NAB, chief executive Cameron Clyne told a business lunch on Tuesday.
Local banks had very little to no direct dealings in Greece, but a default by Greece or another European country could cause interest rates to rise across the board as lenders worried that they're money was at risk of not being repaid.
