All in all, Australian’s banks finished a rough year in pretty good shape: earnings were solid in most cases, even for the two wounded members, the NAB and the ANZ.
Earnings after Westpac’s 6% rise yesterday in cash profit to $3.76 billion and St George’s $1.32 billion, were mostly on forecast: St George’s were higher because the impending merger with Westpac caused costs to fall more sharply in the second half
Combined underlying cash earnings at the big five shrunk just 3%, to $17.1 billion in the 2007-08 financial years, not the result that the 30%-40% fall in the share prices of the major banks would have us expect.
PricewaterhouseCoopers said in their annual assessment of the sector that net interest income rose $4 billion, or 12.2% over the year (it also includes the Commonwealth, which has a June 30 balance date).
PricewaterhouseCoopers said the "robustness of the net interest income book was driven by strong loan growth which continued well into the 2008 fiscal year".
It also reflected the flood of deposits into the banks from security-conscious investors and corporates abandoning riskier (to them) outlets offering higher yields (such as mortgage trusts).
But the black spot was the sharp rise in the level of impaired assets.
They jumped 174% to $6.6 billion in 2008, high, but still only a tiny 0.41% of total loans.
The main offenders were the NAB and the ANZ which accounted for half that figure. Westpac’s nearly doubled to more than $900 million.
The NAB’s earnings fell 23% and the ANZ by around 11% as they were hit by the cost of investing in subprime and other odd investments in the US, and some local companies.
But the 2008 year might be a bit of a high point if the economy fades to even slower levels of growth.
Housing is going to come under further pressure, despite the increase in first home buyer grants.
As we said this week, both Merrill Lynch and the NAB’s economics teams are forecasting a slump in house prices of 5%-10% over the next couple of years.
The banks are all talking about lending being ‘below trend’, that is under the average of the strong levels seen in the past few years.
That means lower interest and fee income, and they have all these billions of dollars on their balance sheets in extra deposits and new funds to fight off the devils of the credit crunch.
And the bad debts lurking in the near corpses of Allco, MFS, Centro, Babcock & Brown and its satellites, and a growing list of wavering property groups, will move closer to appearing in the banks’ bad debts columns.
Of the banks, Westpac was the star, even after a slowdown in second half profits, which dipped by some 8% as bad debt provisions edged higher, but nowhere near the level at the ANZ or NAB.
But it also warned that loan growth was likely to slow in this financial year as consumers and businesses curtail their borrowing in the face of an economic slowdown.
This in turn would produce a rise in impairment charges as unemployment in Australia increased as the economy slowed, which could be a feature of all bank profit reports in the next year to 18 months.
Westpac’s revenue grew by 12.3% to $11.420 billion, and cash earnings rose to the forecast 6% to $3.726 billion. That was a solid performance: for example the NAB could only manage a 4.5% rise in its revenues to $16.57 billion.
The impairment or bad debt charges rose to $931 million in the year to September 30, from $482 million in the previous year, mostly due to a small number of exposures in the institutional banking business.
The bank also noted increased impaired loans in the small and medium-sized business sectors in Australia and New Zealand also contributed, and a modest rise in consumer delinquencies, primarily in New Zealand where the economy has slowed into recession.
But chief executive Gail Kelly said the bank was well positioned for challenging times.
"Westpac has performed well through the global financial crisis with its proactive management of funding, conservative risk profile and healthy capital position," she said in a statement.
"At the same time the implementation of our new strategy to significantly improve the customer experience and better support customers is underway.
"This strategy and the strength of the franchise, have positioned the group well for the challenging year ahead."
Westpac’s total deposits increased by 16% or $31.7 billion to $233.7 billion in fiscal 2008.
The sharp growth in revenue for the year helped the cost to income ratio fall sharply to 43.9%.
Westpac’s net interest margin, the difference between what the bank earns on loans and pays for deposits, fell 0.12% in the year to 2.07%.
Westpac will pay a second-half dividend of 72c, up from 68c a year ago. That makes a total for the year of $1.42, up 8% on 2007.
Westpac shares snuck up 4c to $20.30.
