Has Power Gone To Bully Boys' Heads?

The Sunday Age

Sunday November 2, 2008

James Kirby

HAVE we created a monster? We've guaranteed the safety of banks and now they're going to turn around and cut 10,000 jobs in 2009.

It's starting to look like the Rudd Government handed a blowtorch to the playground bully.

Retail banking - as opposed to investment banking - is a relatively simple business. Banks take in deposits and they give out loans.

In the deposit market, the major banks - post deposit guarantee - now have a vice-like grip that may hold for decades. Why on earth would anyone put cash anywhere else? Online bank accounts are government guaranteed and often provide better rates than elaborate, non-guaranteed options such as mortgage trusts.

In the lending market, after a decade where the non-banks such as RAMS and Wizard steadily built an alternative to the "big four", the credit crisis has meant we're back where we were a decade ago. More than 90% of new loans are signed up by the major banks. In other words, it's game, set and match to the "big four".

As a sector, the banks - excepting Westpac - have just endured their first drop in profits since 1992. And I'm not saying the coming months will be easy.

First our banks must ride out the credit crisis, but there are signs the worst of that crisis may be over - interbank lending rates, the key indicator of banking health, have been dropping for more than a week.

Additionally, there are concerns that banks will be hit by corporate losses that have yet to be uncovered. Big corporate losses would further suppress profitability.

Westpac chief executive Gail Kelly explained this week that the bank has needed to double its "impairment provisions" - that's the money put away to cover looming losses. A key feature of those anticipated losses was bad loans in the commercial property, construction and retail markets.

But essentially our banks are of "sound asset quality". That's a direct quote from auditors KPMG, the same group that estimates 10,000 jobs will go across the banking sector in "fiscal" '09 - the 12 months from June 2009 to June 2010.

Emboldened by their new-found power, you have to wonder if the banks are overdoing the job cuts?

The key measure of whether a bank is tightly run is the cost-to-income ratio. The cost-to-income ratio across the major banks actually fell in the latest batch of results from 46% to 45%. With income levels dropping, it was cost-cutting that improved this ratio.

If you want to put those figures into perspective, the comparable industry-wide ratio for Britain is 67%, according to Michelle Hinchiffe, banking partner at KPMG.

You can only say it's ironic - if not fanciful - to see the Rudd Government asking the banks to step in and support the thousands of investors (mostly pensioners) with their money "frozen" in mortgage funds.

The banks are never going to "step in" and help bail out rivals such as AXA or Perpetual. This is an industry preparing to cut 10,000 jobs just after it had its biggest win in a generation - a AAA guarantee on all deposits.

Standby for higher bank fees, relatively higher rates (that is fatter interest margins).

It won't be pretty, unless you are a bank shareholder - especially at WBC or Commonwealth Bank. Even now, after a 40% drop in the stockmarket, the yield on your bank shares is paying more than cash in the bank. It's too good to be true.

kirbyjourno@hotmail.com

© 2008 The Sunday Age

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