Australian banks post record profits in 2010, coming year may be difficult
SYDNEY: Australian banks posted record profits in 2010 but earnings growth in the coming year may be difficult as the big four prepare to compete for funds with heavily indebted foreign governments.
Westpac made Australian history with a $6.3 billion net profit that pushed the big four banks' combined profits to $21 billion in 2010. This was due largely to falling bad debts as the banks emerged from the economic slowdown prompted by the global financial crisis.
But analysts warn earnings may be depressed in 2011 as higher funding costs pressure the margins of the big four - Commonwealth Bank of Australia, Westpac, ANZ Banking Group and National Australia Bank. On top of the competition from foreign governments in the coming years, the banks are having to refinance their debt at higher post-GFC rates and will pay a premium for longer-term debt as they seek to lock in funding.
"There's going to be a lot of demand for longer duration bank debt than what we've seen in the past," CLSA Asia Pacific analyst Brian Johnson said. This is at a time when the local banks have a huge funding requirement, with CBA and Westpac the fourth and fifth biggest borrowers in global debt markets, UBS analyst Jonathan Mott said.
The past decade saw banks lend more money to home buyers and businesses in Australia without matching the lending with savings. The funding gap was filled by a growing reliance on offshore debt markets.
When the GFC weakened regional banks and caused nonbanks to fail, the role of sourcing foreign capital to fund the domestic economy fell increasingly on the big four. In 2010 the big four passed on interest rate rises to protect margins after funding costs climbed after the GFC.
Now a greater challenge lies ahead: having to compete harder in offshore credit markets against global banks and heavily indebted northern hemisphere governments expected to issue debt aggressively from 2012.
"Banks could find their access to flows of wholesale funding diminishes below critical minimum requirements (their annual re-financing tasks) which cannot easily be replaced by other funding sources," Messrs Martin and Ellis said.
"Ultimately that cost would be passed through to borrowers," Fat Prophets' analyst Colin Whitehead said. So banks are under pressure to diversify their funding sources. Lenders spent much of 2010 competing for more retail deposits and lobbying the federal government to allow the issue of covered bonds.
Southern Cross Equities analyst TS Lim said with interest income still comprising two-thirds of total income, banks will keep diversifying into wealth management and institutional banking products and services. -PB News
ISLAMABAD: Prime Minister Syed Yusuf Raza Gilani speaking in the Senate session on passing the 19th amendment at the Parliament House. -App