Banks' Results Starting To Sour

The Age

Monday March 31, 2008

Danny John, Sydney

RISING bad debts are taking their toll on the major banks' prospects of increased profits over the coming year, with the industry facing higher provisions than originally planned and a consequent heavier impact on earnings.

With four of the top five banks closing their books today on their latest half year results, analysts are anticipating more write-downs on loans made to corporate casualties that could swiftly turn out as actual losses over the next six to 12 months.

While the likes of ANZ, National Australia Bank, Westpac and St George are expected to post relatively healthy profits for their latest interim period (starting April 1), the sector is already anticipating a gloomier outcome for the remainder of the 2008 financial year.

Profit growth for the second half is likely to slow significantly and be in the low single digits, even though net earnings of the top five - including market leader Commonwealth Bank, which reports its next figures earlier than its rivals - are still forecast to hit around $18.7 billion.

But that is a far cry from the last set of healthy full-year results, when the double "whammy" of the global credit crunch and rising interest rates at home had not yet squeezed the banks' margins.

Market watchers are pencilling in earnings downgrades of as much as 5% for the next financial year as the banks take larger hits for bad debts and poorly performing loans.

Investment bank UBS, which is running a list of problem loans from high profile debt-stricken companies such as Allco Finance, Centro, MFS, City Pacific and ABC Learning, now estimates that the leading five banks are exposed to the tune of $8.25 billion - $2.75 billion more than earlier estimates.

UBS has indicated that the unsecured part of the total comes to $3.6 billion, which could result in actual write-offs in 2009.

Another major factor for the banks is the cost of wholesale funding and the higher interest they have to pay for liquidity to cover the increasing demands for financing from business and personal customers.

And while they have passed on some of the extra costs through higher mortgage rates they are still suffering losses on their home loan books.

In its latest analysis of the banking sector, Deutsche Bank estimates the rise in its own borrowing costs from international credit markets will remove between 1% and 3% from the banks' individual earnings per share for this year and as much as 4% in 2009.

Deutsche says it will be hurt more if the price of funding continues to remain high as the banks seek to borrow for longer periods to cover the difference between what they source from their depositors and the amount they wish to lend.

© 2008 The Age

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