Australia’s major commercial banks continue to report some of the strongest profits among their global peers, according to Moody’s Investors Service.
They recorded an average pre-provision income to risk-weighted asset ratio of above 3% in the first half of 2013, according to Moody’s, compared to 2%-2.5% for banks in Singapore, Hong Kong, UK and the US.
“Other banking systems in Asia – like in Indonesia for example – might offer the highest returns, but when you look at the profit Australian banks have made over the past two decades, relative to their credit losses, they are a standout,” said Patrick Winsbury, a senior banking analyst at Moody’s in Sydney.
“This is partly due to good regulation, and partly due to the concentrated industry structure where the largest four banks dominate the market,” said Winsbury.
The country’s banks have been in the spotlight as they reported earnings for the second half of fiscal 2013. Research released by SNL Financial on Thursday last week shows the four largest banks all recorded double-digit year-on-year percentage gains in net income and increased loans by an average rate of 6.6%.
The four banks are National Australia Bank (NAB), Commonwealth Bank of Australia (CBA), Westpac and ANZ.
“Melbourne-based NAB, the largest local bank, led the pack with year-over-year net income growth of 44.75% at A$2.94 billion for the six months to end September,” said SNL Financial in its research summary. The bank with the highest net income for the half was CBA, earning A$4 billion or 16% more than the year-ago period.
“All four banks also saw asset quality strengthen, with an average improvement in their non-performing loans ratios of 17 basis points in the second half of fiscal 2013. Westpac had the lowest non-performing loan ratio at 0.6%, while CBA had 0.71%, ANZ had 0.79% and NAB had 1.29%.”
Winsbury at Moody’s is confident the sector will continue to thrive, and the agency has recently reaffirmed its near-term stable outlook for the sector. “But we also see moderate pressure being exerted on profits as pricing competition for loans increases, net credit costs rise and competition for stable deposits increases.”
This will happen against a backdrop of economic readjustment as the decade-long investment boom in the resources sector declines. “The restructuring of the economy will create pockets of unemployment and the low interest rate environment is encouraging people to pay off their mortgages faster than before, which means net credit growth is actually low,” said Winsbury.
With interest rates likely to remain low for an extended period, banks will continue to see margins squeezed, unless they are tempted to sacrifice their high lending standards in order to achieve growth.
“Anecdotally there isn’t any evidence that lending standards are being lowered, but there is certainly a greater mix of product in the market,” said Winsbury. “The banks are being pushed by the mutual bank sector which is offering interest-only loans and lower deposit thresholds. The area where there is greatest price tension is in high-grade corporate lending and residential mortgages.”
Margins would be somewhat protected if Australia’s banks were able to pay less for deposits but competition for stable funding sources remains strong. Ever since the global financial crisis, the sector has been work hard to reduce its reliance on short-term wholesale markets.
“This has been an effective strategy and Australia’s banks have significantly restructured their funding and liquidity profiles,” said Winsbury. “For example, aggregate short-term borrowings from US prime money market funds decreased by 23% between January and September 2013 to $87 billion.
“That said, we think there is limited room for banks to improve their funding mix further, and competition for stable deposits is only likely to increase.”
