This slowdown is definitely different for our banks.
For all the dud loans and failures by the likes of ABC Learning, Allco and the problems at myriad real estate and infrastructure trusts, this slump is treating our big banks rather well.
Bad and doubtful debt provisions are up as are write-offs, but it is nothing like the crunch felt by the banks in the recession of the 1990’s.
Smaller banks like Bendigo and Bank of Queensland are feeling more pain than the Big Four.
The Commonwealth Bank reported solid earnings for the year to June, and although the second half was weaker, it wasn’t as bad as many investors had been fearing.
On Friday Westpac revealed first-quarter cash earnings of $1.1 billion.
The market didn’t like the news much: Westpac shares fell 57 cents or 2.4% to $22.75.
That fall should be reversed today after the positive day on Wall Street on Friday night.
Some investors didn’t like Westpac’s rise in bad debts in the quarter, but that’s the nature of banking at the moment. However there are signs of conditions getting better.
Bad debts for three months to June 30 increased to $865 million from $811 million in the preceding quarter, which reflected mainly the continued deterioration in the commercial sector in Australia and New Zealand.
"The third quarter has shown some early encouraging signs of improvement," chief executive Gail Kelly said in the statement.
"In particular, stronger business and consumer confidence and better than expected growth in China are assisting the Australian economy.
"At the same time, however, we believe it appropriate to remain cautious, recognising the pace of any recovery is likely to be slow, and that we still face some challenges particularly on the unemployment front."
"Group revenue remained strong at around levels recorded in the first two quarters of the year. Net interest income was higher with support from improved volumes and stable customer net interest margins.
"This was partially offset by lower non-interest income mainly due to the flagged pull-back in financial markets income.
"Expenses remain under tight control, with continued investment in targeted strategic initiatives," directors said.
The bank warned that average funding costs were continuing to rise, and as a result, customer rates and fees would be rising.
As Reserve Bank figures show, Australia’s credit growth is slowing and Westpac’s total lending reflected that, rising by just 1.3% in the quarter, thanks to the recovery in demand for housing finance in Australia, especially first home buyers.
Lending in New Zealand and in the institutional and business banking area slowed.
The bank said it increased its credit watchlist during the quarter and around half the rise in the size of watchlist was in property related lending with the other half spread across the rest of the economy.
"Given the improving economic fundamentals and the extensive reviews of our portfolio we believe that the rate of increase in stressed exposures is unlikely to be repeated in coming months," Mrs Kelly said.
The Australian consumer portfolio performed well, with a small decline in delinquencies, both in mortgages and unsecured lending.
Deposits during the quarter increased 2.3%, which helped fund new lending.
Westpac said St George’s business growth resumed in the June quarter, with strong lending to the home finance sector.
In contrast to Westpac’s basically strong figures and message, Insurance Australia Group is still in the ‘trust and hope’ class for investors that its rotten 2007-09 is behind it.
The insurer has new management and says things are improving, but a huge storm could quite easily derail any rebound.
Net earnings of just $181 million on gross written premium – revenue – of $7.84 billion, (up 4% on an underlying basis) shows how bad the year to June was. A look at the QBE results will confirm that.
But QBE has an international spread, so a better comparison will; come this week when the embattled Suncorp Metway (which controls AAMI, GIO and Suncorp insurance groups) reports., especially in Australia.
IAG shares dropped 6.5% on the news, or 25 cents, to $3.55, much deeper than the slight fall in the wider market after it reported in the morning Friday.
The net earnings figure was after an underwriting profit of $515 million for the year, up by $123 million on 2008.
The company’s underwriting margin rose to 7.1% from the poor 5.4% in 2008.
But higher pay-out claims resulting from bad weather, and losses on its investment portfolio caused by volatile financial markets hit the underlying result (As it did for QBE, which was buttressed to an extent by a big one off profit from currency movements).
IAG had no such luck and nor will Suncorp’s insurance group when they report later this week.
But IAG pointed out that the poor 2009 result was the first rise in earnings for four years.
The group has cut costs, written down or sold off much of it’s the UK business acquired under the previous management and restructured its Australian operations to try to improve returns.
Shareholders face a lower final dividend- from 13.5 cents l
