Investors Bid Up Banks Despite Rise In Bad Debts

Sydney Morning Herald

Friday July 18, 2008

Jacob Saulwick

BANKS were chalking up a record increase in bad debts even before the most recent wave of the credit crisis, figures published yesterday show, amid continuing gyrations in global sharemarkets and oil prices.

According to the Reserve Bank, total impaired assets - or bad loans - held by Australia's banks jumped $3 billion to $7.3 billion in the three months to the end of March, a record quarterly increase, taking their bad debt ratio to levels not seen in nearly four years.

But the rise in bad debts failed to deter investors yesterday as they leapt on positive signs from Wall Street as an excuse to whip the market higher for a second day.

The benchmark S&P/ASX200 rose 30.4 points, or 0.62 per cent, to 4901. The big movers again were financial stocks, which climbed 3.88 per cent.

In the US, stocks soared due to a further slump in oil prices and a better-than-expected result from a big bank, Wells Fargo, which also surprised by lifting its dividend 10 per cent. The announcement sent US banking shares on a wild ride, some climbing as much as 30 per cent.

Overnight profit reports from Merrill Lynch and JP Morgan will test whether the bounce can be sustained. Concerns about a slowing global economy and rising inflation pushed oil prices down sharply for a second day, with futures falling $US4.14 to $134.60 a barrel in New York, but they recovered yesterday during Asian trading hours.

The head of dealing at Southern Cross Equities, Charlie Aitken, said the Pope's visit might mark the bottom of the local sharemarket. "I'm sick and tired of waking up to hearing about Fannie Mae and Freddie Mac," he said. "Eventually companies are priced off their own fundamentals, not on overseas sentiment."

The start of the company reporting season in two weeks would give investors a chance to look at some relatively strong corporate earnings, as opposed to ill-winds from overseas, Mr Aitken said.

In the past week companies that have delivered reasonable messages to the market - such as solid sales figures from Woolworths, or Toll jettisoning its stake in Virgin Blue - have climbed strongly. Woolworths is up 6.5 per cent in two days, and Toll is up 12 per cent.

But the economic situation remains perilous, particularly in the US. Growth is grinding to a halt at the same time as inflation is emerging as a big threat. Consumer price figures published on Wednesday showed US inflation running at an annual 5 per cent, the highest since 1991.

Testifying before Congress, The chairman of the Federal Reserve, Ben Bernanke, said inflation risks had intensified.

The credit crisis has also sharpened, prompting rises in bank interest rates in Australia.

A snapshot of the bad debts creeping on to bank balance sheets showed the percentage of impaired assets to total assets had climbed from 0.19 per cent to 0.31 per cent.

"Slower growth is impacting on banks," said a CommSec economist, Savanth Sebastian. "But they remain strong overall, and are chalk and cheese compared to the US banks."

Analysts at UBS said the country's banks should be resilient to rising mortgage defaults. Even if interest rates reach 13 per cent, unemployment climbed to 8-10 per cent and house prices dropped 20-30 per cent, total losses from the big banks would total only $1 billion, according to bank "stress-testing" done for the prudential regulator.

Market report - Page 22

© 2008 Sydney Morning Herald

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