This week will underline the stunning difference between the health of Australian and US banks.
That’s after the emergence of last week’s political argument over interest rates, bank growth policies and competition.
American banks continue to be bedevilled by failures (more last Friday night, our time), weakening revenues and profits (especially in investment banking), and still weak revenues and profits from bread and butter banking.
Falling bad debts, losses and provisions are making life more palatable for US banks, but the gathering documentation scandal on foreclosures could reverse this improvement, as could the emergence of demands by investors for banks to buy back dud home loan mortgages from broken derivatives (such as CDOs).
By contrast Australian banks are doing well (as we all know).
Profits are solid, bad debts falling, but the outlook isn’t so good.
This week the Melbourne members of the gang of four, the ANZ and NAB, will report full-year results.
Profits are expected to be around $9.4 billion on a combined basis.
That will be around 25% or so higher than the 2009 profits of both banks.
Midweek sees the annual meeting of the Commonwealth Bank, where we will no doubt get a robust defence of banking, and bank profits and we will be told how the industry is wonderful; (but not that it needed supporting by the Reserve Bank in 2008 and the federal government and taxpayers).
Westpac, which follows the following week, will show that the big four have increased cash profits by some 70%, from a combined $12.6 billion in 2009 (which was a depressed year, to $21.4 billion in the 2010 financial year).
The 2010 profits will be bigger as a total than the previous boom years of 2006-2007.
But according to some analysts, in the coming year the banks will face slowing growth and more margin compression.
That explains the lukewarm support banks are getting from investors at the moment.
And, there’s another reason: the continued concern of more uncertainty in the US banking.
The foreclosure documentation scandal is capturing the headlines, but seven banks were shut on Friday by regulators: the total number of failures this year is 139, just one short of the total for all of 2009.
At this stage last year, 106 banks had been shut, and although the seven on Friday was the biggest since July 23, when another seven where closed, the rate of collapse is definitely slowing and the year’s total won’t be as large as previously thought (estimates were from 170 to 200).
Since the crisis started in 2007, 306 US banks have been closed or collapsed, including the largest, Washington Mutual.
The biggest failure last week was Hillcrest Bank of Overland Park, Kansas, which had approximately $US1.65 billion in total assets and $US1.54 billion in total deposits.
Regulators also closed First Arizona Savings, Scottsdale, Arizona; First Suburban National Bank, Maywood, Illinois; First National Bank of Barnesville, Barnesville, Georgia; Gordon Bank, Gordon, Georgia; Progress Bank of Florida, Tampa, Florida; and First Bank of Jacksonville, Jacksonville, Florida.
A total of 27 Florida banks have been shut this year, the most for any state so far.
But the big worry for US banks, especially the big ones, was the ratings warning from Fitch after a new policy announcement before from regulators led by the Federal Deposit Insurance Corporation.
That is called the Too Big To Fail policy announced around 10 days ago. Fitch feels it threatens a number of points about its bank ratings.
Fitch believes this new measure could eliminate the government support currently implicit in its ratings on US financials.
The new policy restates that under no circumstances should taxpayers ever be called upon to bail out systemically important financial institutions in the future, nor be exposed to loss in the resolution of these companies.
While the policy also reiterates the FDIC’s mission of resolving institutions in a manner that ‘maximizes the value of the company’s assets, minimizes losses, mitigates [systemic] risk and minimizes moral hazard’, it nevertheless makes clear that creditors, including senior bondholders, should bear their proportion of the loss in an orderly resolution.
Fitch says this more "stringent mandate to impose losses on senior unsecured creditors calls into question the very core of Fitch’s Support rating framework, the likelihood of full and timely payment in the event that the rated institution faces serious financial deterioration in the future".
So Fitch Ratings issued a number of separate press releases placing on Rating Watch Negative most US bank and bank holding companies’ Support Ratings, Support Floors and other ratings that are sovereign-support dependent.
The two companies mostly impacted by this announcement are Bank of America Corporation and Citigroup, Inc.
This is due to the fact that both entities’, and their related subsidiaries’ Issuer Default Ratings (IDRs) and their respective senior debt obligations, have benefited from support provided by the US government.
At the present time, Fitch’s long-term ‘A+’ IDR ratings for Citigroup and Bank of America incorporate a "three-notch uplift for the long-term rating and a two-notch uplift for the ‘F1+’ short-term ratings."
(In other words, without this assumed level of US governm
