Once again there’s a reality gap in banking
This week we saw the NAB reported a solid profit and get away with a 24% cut in dividend, yesterday the ANZ did the same.
There was probably more justification for the ANZ’s dividend cut because its cash earnings (the only way to examine bank profits across all players) fell 43% to $954 million, while the NAB’s fall was 9.4% to $2 billion.
The market didn’t like the ANZ result: the shares fell $1.23 or 7.4% to $15.40. The NAB meanwhile fell 74 cents to $20.54, its second day of a fall of more than 70 cents.
After the rebound on Wall Street overnight, watch investors chase bank shares this morning as they shake off those brief concerns.
But for all the bleating of the banks about how tough times are; and how tough they are going to be, all the bad and doubtful debts, the damage has so far has been of the banks’ own making: the previous managements maybe, but the boards remain in place.
No one forced the ANZ to lend or get into exotic financial arrangements with US monoline insurers which are now all but failed, or have seen the credit ratings collapse because of equally dodgy deals with other banks to insure a wide and varied collection of now toxic assets for a fat fee. No one forced the ANZ to fund Opes Prime or Trico.
Driving losses at the ANZ was a worse-than-expected doubling of bad debts to $1.43 billion with the collapse of customers such as Babcock & Brown and ABC Learning. ANZ lent that money willing.
And it freely entered into a portfolio of credit instruments which again cut earnings, slicing $664 million from the interim result. The bank took $79 million in restructuring costs after cutting more than 440 Australian staff in the past six months.
And no one forced the NAB to do deals with exotic financial instruments that are now unsalable and are still held off balance sheet in a so-called conduit.
It’s only from now on that the impact of the recession will hit home as more and more smaller companies get into trouble because of falling sales, cashflows (And some big companies as well).
As well the banks expect higher home loan and credit card defaults and arrears, but seeing they will do deals to restructure these personal lending products for six to 12 months, they won’t be as much of a problem because they will still be current, interest will still be paid (a smaller amount). So any potential provision will be smaller than if the loans had failed and the house sold off.
And our banks have fattened their interest margins in Australia especially. In fact both banks local businesses did very well, especially in retail with either a small rise (NAB) or a small fall (ANZ) on the March half of 2008.
From 2% (200 basis points) in the March half last year, ANZ’s net interest margin jumped to 2.22% in the March half year.
The NAB’s net margin rose 0.17% to 2.53% from 2.36% in the same period of 2008. In both cases those gains reversed the steady compression of margin from 2003 onwards as competition in home and personal lending heated up and big business customers went to market directly, forcing down fees and rates.
Next week Westpac will unveil an interim profit that promises to very good, thanks to its higher margin and the St George takeover, although the bank of CEO Gail Kelly will bleat on about how tough times are and look like being.
Our banks are doing well: not earning record profits, but solid, recurring earnings, from tight, but growing margins. Some big US banks, such as JP Morgan, were working with margins of 4% or more in the March quarter.
No wonder they returned to profit, but not from home lending and other recurring areas, but from trading profits, borrowing cheaply from the Fed and lending it out at higher rates: "playing the yield curve".
Westpac will be hard pressed to justify any dividend cut: the NAB did it to make sure the market understood the shareholders were paying the price (What about the board and senior management who made the crazy, dodgy loans in the first place, or who hung onto the almost profitless UK banks when they could have been sold?)
We saw the National Australia Bank talking tough and hinting at rate rises, no more rate cuts if the Reserve Bank cuts the cash rate again and warning about tough times to come.
Overall the impression was for another tough 12 months with higher bad debts, although CEO, Cameron Clyne did concede that there was a chance the Australian economy might not have as deep a recession as some people thought.
All this "statesman-like" commentary was to disguise the fact that the bank had done pretty well in a tough environment, with cash profit down 9.4% to $2 billion, on net income of $8.7 billion (a nice fat margin of 22.9%).
And the dividend was cut to satisfy the bloodlust among analysts and some in the community who wanted to see someone ‘pay’ for the slump and the credit crunch.
Then there are the ANZ’s results: on one reading not so bad, on a comparison with the NAB, bad (Source).
The cash profit wasn’t mentioned until the fine print on page 7 of the report to the ASX and the accounts. It wasn’t mentioned at all in the press release.
This is how the ANZ release started:
"Australia and New Zealand Banking Group Limited (ANZ) today announced an underlying profit for the first half of 2009 of $1,908 million up 20% on the preceding half (up 4% pcp).
"Including net impacts from one-offs and non-continuing businesses, statutory profit grew 4% to $1,417 million comp
