Our Enviable Bankers Line Up To Boast Billions On Books

Sydney Morning Herald

Tuesday October 21, 2008

Danny John

It seems apt in a US presidential election year to paraphrase a Clinton mantra for the pinched situation in which our big banks now find themselves as the economy turns south at an alarming rate.

With National Australia Bank today kicking off the reporting season for the financial services sector, investors and consumers alike would do well to heed the following phrase as they comb through the results: "It's not 2008, stupid, it's 2009 that really counts."

If anything, it can be argued that NAB's profit of about $3.9 billion is irrelevant to the debate about the immediate prospects of the banking sector and the economy.

Sure, such a result cannot be dismissed out of hand, because it will tell us something about the relative health of the bank's balance sheet and how it has managed its way through the first year of a global credit crisis that has brought many international banks to their knees.

To that end NAB will have had a "good" year, not withstanding the fact that its exposure to some extremely complex subprime housing loan-linked investments in the US has cost it $600 million.

Yet it remains a solid pillar of Australian banking. It has done the utmost in drawing benefit from the oligopoly of the four big banks that increasingly dominate the domestic industry - an industry that has helped to insulate them from the worst excesses of the crisis.

The same can be said of the ANZ, which has had its fair share of seemingly self-inflicted financial troubles, but which will nonetheless report solid cash earnings of about $3.1 billion on Thursday.

Compare that with the mega-losses of the one-time giant US investment banks, the flattened Icelandic banks or British institutions like the Royal Bank of Scotland, which now find themselves in state hands, and it is little wonder that senior Australian executives such as NAB's Ahmed Fahour have no desire to swap their economic fortunes for those around the globe.

In fact, there will not be a bank chief executive anywhere in the Western world at present who would not love to be sitting in either of the seats of Fahour's boss, John Stewart, ANZ's Michael Smith, Westpac's Gail Kelly (who will report an expected $3.74 billion profit next week) or St George's Paul Fegan (with his forecast earnings of $1.3 billion).

And we should not forget Ralph Norris at the Commonwealth, who turned in profits of $4.7 billion a year on from last August's anniversary of the start of the financial maelstrom.

In all, the leading five banks should have turned in about $16.75 billion in total earnings for the 2008 financial year by week Wednesday week - not quite as good as 12 months ago but still more than enough to grab the public's attention in these financially stretched times.

But that figure will tell only part of a story, much of which is now out of date. For each of the results in question refer to a year that ended on September 30, and in the case of the Commonwealth June 30.

That means the chaos caused by the financial maelstrom at the end of last month and much of this one is excluded from the picture, leaving shareholders and customers alike dependent on the outlook statements of all four as to where they - and therefore the country - are headed.

But even with only a couple of weeks of anecdotal evidence available to them, it is already clear from the commentary accompanying the most recent interest rate cuts that 2009 is shaping up to be a hard year.

The clue to that is a clear shift in the need for the banks to recover their high costs on providing money for lending from what they borrow from other institutions to them now pushing the Reserve Bank to cut interest rates so that they can pump more cash out to consumers and companies to keep the economy going.

It is one thing to be concerned about falling profit margins on one part of your business but another altogether if all of your business starts drowning in red ink because millions of your customers are doing it tough.

That is the situation now facing the banks. It's the "R" word writ large, and they will be stupid not to do everything possible - including cutting rates at every possibility - to stop it becoming a reality.

© 2008 Sydney Morning Herald

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