Banks Facing Tougher Times

The Age

Monday May 12, 2008

Mathew Murphy

DOUBLE-DIGIT growth over the past several years has ended for the big banks, and they are about to experience further increases in the cost of bad debt.

However, a half-yearly report card by financial advisory firm KPMG states that the outlook for the banks is significantly healthier than that of their overseas counterparts, which recorded more than $US250 billion ($A265 billion) in asset write-downs and credit losses since the start of last year.

"Bad debts have increased but these have, by and large, been one-off losses, rather than any reflection of system credit-quality problems," said Andrew Dickinson, head of KPMG's banking practice.

"The result, when looked at in the context of global markets, is a solid one for Australian banks.

"Prudent lending policies over the past few reporting periods have protected the Australian banks from the catastrophic results reported elsewhere."

On the plus side for the banks, profit increased 12.7% to $9.8 billion in the first half of 2007-08, compared with $8.7 billion in the previous corresponding period.

Revenue grew 3.6%, driven by increased lending and bank fees as well as one-off items.

Cash return on equity fell from 21.1% to 19.2% below the previous industry benchmark of 20%.

The downturn in the sharemarket prompted investors to shift cash from investment funds into bank deposits. As a result, wealth management profit increased by $915 million compared with $834 million in the first half of 2006-07.

"Given significant market volatility and uncertainty in recent months, it is not unexpected to see a shift of funds from the wealth management industry to banks," Mr Dickinson said.

Last week St George Bank cut its earnings forecast for the rest of this financial year from 10% to as low as 8%, after first-half core profit growth slowed.

National Australia Bank reported a 25.8% increase in first-half net profit to $2.7 billion net profit.

However, it has increased its first-half provision for bad and doubtful debts by 86.2%, setting aside $726 million.

© 2008 The Age

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