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Australia: the rocky ride is not over yet

Although Australia’s golden age of banking officially ended last December when bank lending felt its first month-on-month contraction since 1992, its banks have weathered the storm remarkably well. The Big Four Australian banks are firmly placed within the top 13 ranks in The Asian Banker 300 (AB300) ranking for biggest regional profits.

However, that does not mean that they have been left completely unscathed by the credit crunch - the banks’ ROA fell in 2008 to 0.61% from an average of 1.9% a year earlier, and ROE also fell to 10.84% from an overall average of 13.74% in the same period. Again, this can be attributed to the fall in net profit through a surge in credit impairment charges, which trebled to $6.8 billion in 2008, from $2.4 billion in 2007. Most of the country’s banks managed to maintain profits, although NAB’s 0.9% dip in annual earnings broke Australian banks’ 15-year profit growth streak. That was followed in December with a $139 million loss at Bank of Western Australia; once an aggressively expanding financial institution, loan impairment expenses of $570 million took its toll on the HBOS-owned bank in 2008, and it was sold off to Commonwealth Bank of Australia at the end of 2008.

The merger between Westpac Banking Corporation (Westpac) and St George Bank on December 1st, 2008 has led to the establishment of Australia’s second largest entity by assets, and has led to pressure on the other Big Four banks to acquire and maintain their market dominance, although acquisition targets remain scarce. Bendigo Bank and Bank of Adelaide completed their merger a day before Westpac’s, to become Bendigo and Adelaide Bank, the number 125 in the AB300 with assets of $330 billion (they had been at positions 200 and 134, respectively, in the previous year’s AB300).

The banks, in particular the Big Four, engaged in continuous debt issuance for capital raising through-out the fiscal year, and since the beginning of 2008 Australia’s banks have held over 50 capital raising exercises, of both equity and debt, with the latter being the more common method. But despite the frequency, volumes were typically low in 2008 with the majority of the exercises being small, frequent bond issuances, often of only a few million dollars. The slow pace continued into 2009, but eventually gathered pace when NAB successfully raised $2.25 billion in July in an underwritten share placement, while ANZ raised $2 billion in May. In both cases it seems that the capital raising was conducted primarily to improve market share in SME business lending, with the banks feeling the pressure from the merger between Westpac and St George, although ANZ eventually used $550 million in August 2009 to buy The Royal Bank of Scotland’s operations in six Asian markets.

The Australian banks have historically had the lowest NPLs in the region, and the trend continued throughout 2008 with four banks, Bendigo and Adelaide Bank, Bank of Queensland, Commonwealth Bank of Australia and St George Bank occupying the top four places in the AB300’s gross NPL ratio ranking, with figures of 0.1%, 0.1%, 0.2% and 0.2% respectively. This occurred despite the average gross NPL ratio more than trebling during the period of the fiscal year, from 0.25% in 2007 to 0.79% in 2008, meaning that some large banks have been hit with a wave of bad loans. Recent figures for NAB, ANZ and Westpac show that NPLs moved up 0.4%, 0.6% and 0.4% to 1%, 1.1% and 0.8% respectively, signalling the clear start of a worrying trend. NPL provisions have also been steadily rising throughout the year, with NAB announcing $574.3 million in provisions in July to cover credit losses and ANZ announcing $678.2 million worth of provisions to cover bad debt losses.

The Australian banks currently have a lot of reserves due to the capital raised throughout the year. The average capital adequacy ratios across the banks have risen to 12.26% in 2008 from 11.86% a year earlier. Perhaps what will determine the performance of the Australian banks next year will be how they put this capital to use, and whether they actually lend or acquire, or just sit on their capital.