The interim result from the Commonwealth Bank yesterday underlines the widening gulf between the health of our banks and those overseas.
Our banks may have some dodgy loans, be collecting billions of dollars in easy loans from risk averse investors, and playing hardball with a growing number of clients, but they are solvent.
In fact the CBA, in warning that the sustainability of the company’s dividend might be hard to continue (the interim was an unchanged $1.13) in view of the gloomy outlook, was talking about something foreign to more and more offshore banks: dividend payments to shareholders, and at very high levels.
Banks in the UK, Ireland, Denmark, Spain and in other leading economies are doing it tough.
With a couple of exceptions, the UK banking system is semi-nationalised and living on welfare; so is the US where the latest bank bailout attempt has flopped because of a rotten speech by Treasury Secretary, Tim Geithner and inadequate attention to detail.
The US Treasury is going to conduct a "stress test" of the big American banks (the requirement is to have $US100 billion in assets) as part of its latest bailout package as a way of seeing if they are ‘healthy’ or need for Government cash.
At the moment in the US, the answer for many of those (with the possible exceptions of Goldman Sachs, Morgan Stanley and JPMorgan Chase and Well Fargo) wouldn’t be nice.
Many UK and American banks are basket cases, and will fail the test. That includes some of the biggest names in finance.
What happens if they fail? Another capital injection from the Government that will be tantamount to saying that the bank failed the ‘test’.
And what happens if the same bank fails a follow up test? After Lehman Brothers collapse, does the US Government and global financial markets have the stomach for another mega collapse?
All of Australia’s big four banks would be included in the list of 14 US banks with $US100 billion or more in assets. All would pass the stress test.
That’s a point that the Commonwealth Bank emphasised yesterday with its sold interim profit of $2.013 billion on a cash basis, down 16%, as forecast last week.
The bank warned the dividend might not be able to be maintained at present levels. At least a dividend is being paid ($1.13 for the December period), even though earnings per share were running at $1.46.3 cents, making the payout ratio for the half, 86%.
The market ended up liking the result: the shares rose 30 cents or 1% by the close to $29.20.
For banks in the US and the UK, dividends are a luxury unknown to them at the moment. In Australia, they are something to cut to conserve cash.
It’s still the best measure of the huge gap between us and them and the best way of explaining the still solid nature of our financial system, despite the knocks and the slowing economy ahead of us.
That’s not to say that the CBA result was exemplary. It isn’t with five major dud loans ruining the result and one of those the more than $800 million advanced to ABC Learning Centres.
The CBA mentioned the 16% fall in first half results to just over $2 billion (on a cash basis) but frequently played up the statutory after-tax profit figure of $2.57 billion – a 9% rise totally attributable a $547 million gain after buying BankWest late last year.
Such spin is understandable because it diverted attention from the run up in bad debts, which are attributable to dud lending to dud companies.
Impairment charges soared by $1.27 billion to $1.6 billion as the bank was whacked by its exposures to failed corporates such as ABC Learning and Allco Finance Group and the near dead Babcock & Brown ‘investment bank and asset manager’.
Chairman John Schubert said the board was ”particularly mindful” of the need of shareholders to maintain the half year dividend given the falls in payouts being experienced by investors right across the market.
Investors focused on the bank’s on-going operations and the impact of the rising bad debts on its performance. Attention was drawn to that by the botched fund raising last year where the bank told the manager of the placement about a rise in bad debts as a proportion of total assets, and claimed it then should have been passed onto the market. It was the CBA’s responsibility.
The bank didn’t mention the rise in bad debts until the statement to the market after the money had been raised.
The Commonwealth said its bad debt position had been affected by a combination of a ”small number” of single name corporates, increasing problems in its wider consumer and small business loan books and a need to cover for future problems.
In all, the bank has now taken its total provisions to more than $3.6 billion, a surge of $2.2 billion over the 2 months from December 2007.
And they won’t stop there. There’s little chance of any improvement.
The bank said that whilst indicators showed that credit growth and unemployment levels were still ”reasonably benign” conditions over its second half were expected to become more difficult.
Naturally, given the way competition has disappeared, one stronger performing parts of the group was retail banking which saw its contribution to profits rise by 15% over the corresponding year-on-year period.
Its operating earnings rose from $975 million to $1.1 billion boosted by the ”flight to quality” from worried customers who sought the strength of the CBA and the other big banks over non bank groups and smaller banks.
But reality intruded for the CBA’s two other major divisions, premium banking which covers the corporate and large company sector and its wealth management arm which is directly exposed to th
