Bank boom and bust

westpac

There was more creepy coverage of banks at the AFR over the weekend.

First was Matthew Stevens:

The global financial crisis and the frightening structural risks and uncertainties it triggered appear to be over at last.

Only three days after ANZ Banking Group lifted its dividend ratio, Westpac added shareholder-sating sparkle to its own increased interim payout with a 10¢ a share, fully franked special dividend. The initiatives of both banks suggest that, for the first time in half a decade, the sector’s capital management strategy has slipped from the routinely defensive setting that has been maintained since 2007.

Needless to say, Westpac boss Gail Kelly doesn’t quite see it my way.

Yes, Kelly acknowledges that Westpac particularly and the banking system generally have reached a point where capital accumulation is no longer the primary quest it became in the face of GFC and the coincident uncertainties that were fuelled by global banking’s embrace of the Basel III protocols.

I’ll note in passing that if the GFC is over, why do free government guarantees exist for deposits, for wholesale borrowing (implicitly), virtually free for liquidity via the RBA, keeping competition close to zero?

Second was Andrew Cornell‘s breathless praise:

Westpac’s result provides firm evidence that there is no fundamental issue with bank earnings quality: the productivity story was good, the bad debt story was good, the capital generation story was good, the yield story was good. There was no evidence of a looming collapse in any of these components – which of course doesn’t tell us when the market might decide that, relative to other assets, bank shares might be overvalued.

That’s where the debate lies. As Citi said in a refutation of the bubble theory: “We believe that Australian bank dividend yields will continue to attract investors while alternative investments provide significantly lower returns and the earnings and dividend outlook for the sector remains solid near term. All we can say is, buy ANZ, CBA and WBC today!”

Better was available from Tony Boyd, Chanticleer, on the back page, who at least posed a question:

Westpac takes the view that lending to households and businesses will pick up substantially over the next 18 months to two years. It is forecasting credit growth to business will rise from 2.7 per cent in 2012 to 4.5 per cent by the end of 2014. It thinks housing credit will grow from 4.5 per cent at the end of 2012 to 6.3 per cent by 2014.

It holds these views even though it thinks unemployment in Australia will tick up from 5.3 per cent at the end of last year to 5.8 per cent by the end of next year.

…Macquarie reckons companies will ultimately return to the equity capital markets and do all the things they did before the global financial crisis.

But what if they are both wrong? What if the cyclical lows in credit growth and capital markets activities are a new normal? That is distinctly possible, according to analysis of global banking revenues by McKinsey & Co. After climbing for 30 years, the share of economic activity attributable to bank revenues fell after the global financial crisis to 5 per cent of global gross domestic product. McKinsey says it will remain at that level until 2020 – which is about the same as nominal GDP growth and following the pattern of other industries.

Getting there, Tony, but no cigar.

The question that needs to be asked is this: the last time Westpac issued a special dividend was in 1988, at the cyclical peak and before it was on its knees asking Kerry Packer for an equity injection. As we enter an historic terms of trade correction and go over the mining investment cliff, is now an appropriate time to be depleting capital at the bank? At all of the banks?

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. [Westpac] is forecasting credit growth to business will rise from 2.7 per cent in 2012 to 4.5 per cent by the end of 2014. It thinks housing credit will grow from 4.5 per cent at the end of 2012 to 6.3 per cent by 2014.

    Is this what Bill Evans is forecasting?

      • GunnamattaMEMBER

        and if it means any of those things it doesnt mean them for every long, surely.

        If they blow out housing, the current account or wholesale borrowing that could only be a stepping stone to something else, as the moment they ‘achieve’ them they generate their own rate reaction which presumably blows them away.

      • I don’t know. The mining investment cliff is awful. But markets are clearly shifting into a new post-GFC phase. The amnesia of easy money is obviously settling over equities. It’s not impossible that markets could allow us to sail unhindered into a new consumption boom. The RBA won’t stop it. Would Australians do it and could that carry us through to the LNG volume boom in 2015?

      • Pfh007MEMBER

        Yes. – plus a government that will not act even if it understood the issues and an opposition that seems to think the options available to Howard and Costello are still on the table.

        The ship may be heading towards an iceberg and is not changing course but it may still be some time before the bells are heard in steerage.

      • GunnamattaMEMBER

        I’ve seen this line of reasoning before…..

        Looks like an economic policy version of doubling up with the weekly bills cash for race 8 after coming up short on a soft track in the earlier races…

  2. I’m really amazed that Westpac doesn’t see a mining bust affecting lending negatively. Resources supports 10% of jobs in Australia. The HIGHEST paying 10% of jobs.

  3. I find it incredible that the MSM conducts analysis of bank profitability and share prices without even vaguely acknowledging the raft of explicit and implicit government backstops they benefit from. Surely that has now become one of the fundamentals behind the banks’ continued high share prices, yet it’s not even mentioned as a factor. However, everyone knows that’s the case anyway, so my bet is that bank share prices will remain elevated as long as there is confidence that the big banks are TBTF and that the taxpayer has got their bank.

      • Alex Heyworth

        Interesting little snippet, Mav. I presume they have also tested even more extreme house price collapses, say 40%.

        Seems to me that most people will stay put and keep paying the mortgage if they can, even when they are underwater. In the scenario outlined, of unemployment rising to 11% initially, it’s quite possible the government would step in to help home “owners” struggling with mortgage payments because of loss of employment. An extension of rent assistance to mortgage payers, for example.

      • Alex Heyworth

        What doesn’t? The Westpac modelling?

        What I would be concerned about is that the impact on their housing loan portfolio is by no means the full story. They would be bound to take a big hit on their consumer lending and business lending as well if that scenario unfolded.

      • Alex Heyworth

        What doesn’t? The Westpac modelling?

        What I would be concerned about is that the impact on their housing loan portfolio is by no means the full story. They would be bound to take a big hit on their consumer lending and business lending as well if that scenario unfolded.

      • Alex Heyworth

        Sorry about the duplicates. Don’t know how it happened. Usually I get a message saying it looks like you’ve already said that if I inadvertently hit “Submit Comment” twice.

  4. Alex Heyworth

    Westpac did not go bankrupt. The recorded a $1.6b loss in 1992, which was the largest by an Australian company at the time. They were forced into a rights issue to restore their Tier 1 capital ratio, sacked numerous staff and lost their place as the no 1 bank, dropping to third. But no bankruptcy.

    They (and all other Australian banks) are far better managed than they were then. Capital adequacy ratios are significantly higher.

    Having said that, they are still overpriced by about 60%. (IMHO)

  5. The Patrician

    The GFC level OCR and the GFC free govt-backed deposit guarantee continue to inflate the bank bubble.

    CBA up $1.00+ this morning.

    Stop cutting the OCR and charge for the deposit guarantee.

  6. Today looks like another buy miners, sell banks day. It seems we’ve entered a new phase in market behaviour of oscillating between buying banks, and buying miners. Its the new risk-on, risk off!

    Banks, miners, banks, miners, houses, holes, houses, holes…