Cba Braces For Year Of Gloom

Sydney Morning Herald

Wednesday March 19, 2008

Jacob Saulwick

THE Commonwealth Bank has predicted the credit crisis will drag on for at least 12 months, amid signs the full impact of the crunch on bank balance sheets - and what banks will be willing to lend to borrowers - will not be felt until at least next year.

The bank's chief executive, Ralph Norris, said yesterday that lending rates were likely to increase in the coming financial year, as dysfunctional debt markets put the global banking industry under pressure.

At the same time, analysts are predicting banks will start cutting lending to businesses and households - if they have not already.

One reason is that while Australia's big banks have managed to secure most of their funding for the 2008 financial year, due to the turmoil in money markets, much of that debt has been relatively short-term.

This means banks will be forced back into the market seeking heavy volumes of funding next year, when debt markets are likely to remain relatively tight and therefore more expensive, forcing banks to pull back on new lending.

In a note to clients, analysts from ABN Amro estimated that each of the top five banks might need to tap markets for $40 billion next financial year, compared with $25 billion a year earlier, just to refinance their current balance sheets.

This would increase the chance of more customers not being able to repay their debts.

"The impact of a prolonged liquidity crunch, in our view, could constrain lending growth and therefore economic growth, which ultimately leads to further bad debts," wrote ABN Amro's team, saying that despite falling share prices they remained cautious about the sector.

Addressing the American Chamber of Commerce in Sydney, Mr Norris said the Australian economy was moving into a period of rising inflation, increased interest rates and market volatility that had not been seen in more than 50 years.

"While we hoped this liquidity crunch would be a short-term phenomenon, it's clear this crisis is going to continue for some time," he said.

"In my view it will be at least 12 months, and possibly longer, until the full impacts flow through markets and we return to some sort of equilibrium."

Mr Norris also counselled governments against reimposing excessive regulation, just so they could be seen to be doing something in a time of uncertainty.

He said there was the danger that knee-jerk reactions often led to clumsy regulation, which could undermine competition and stifle innovation.

Shares in banks and other financials have fallen heavily since the credit crisis escalated in November. Commonwealth shares rose 22c to $37.57 yesterday, but are more than 30 per cent off their peak last year.

Mr Norris said it was perplexing to see how shares in Australian banks, which have reported record profits, had been sold off more heavily than their US counterparts that have reported huge losses and, in the case of Bear Stearns, have probably finished as businesses.

The ABN analysts named NAB and Westpac as their top picks in the sector.

© 2008 Sydney Morning Herald

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