So Little Joy As Cash Comes Rolling In

Sydney Morning Herald

Thursday August 14, 2008

Ian Verrender

Never in the field of Australian banking was so much delivered to so many. And never were so many disappointed.

Ralph Norris at the Commonwealth Bank of Australia yesterday unveiled a mammoth $4.79 billion profit. A record result, it was 7 per cent up on the previous year and slightly better than expected.

CBA shareholders responded by dumping the stock. At one stage Commonwealth shares were down 2 per cent, in line with the broader market, but rallied a little in the afternoon, finishing the day 1 per cent lower at $44.05.

The customers weren't happy either, particularly after Norris picked up the song sheet Westpac's Gail Kelly used in her performance last Friday and joined in the chorus.

Yes, the Reserve Bank was likely to cut rates next month. And, yes, we'll do our best to pass on as much of that cut as possible. But we only raise about half our funds on the domestic market so don't expect to get the full instalment.

So similar is the message coming from all our banks, it as though they are acting in unison. We're not talking Dick Pratt-style meetings in pubs and calls from phone boxes, more a tacit understanding of the way business ought to be done.

The CBA boss had a blunt message on this front yesterday. The bank offers the lowest mortgage rates in town. And it didn't pass on the full increases in funding costs when they were on the way up. So it won't be passing on the full decrease when they start to come down.

The CBA's cost of funding rose $100 million in the first half and $179 million in the second half. But given all our banks are earning huge profits, in a fiercely competitive environment one of them surely would break ranks.

That issue aside, the CBA result is remarkable coming as it does in the midst of the worst crisis ever to hit the global financial system - a crisis that only now has shown some tentative signs of easing.

In fact, Australia's banking system has emerged as a shimmering oasis in a world left barren and scorched by insurmountable greed, reckless behaviour and scant regulation.

Even our worst performers, ANZ Banking Group and National Australia Bank, which between them put aside $2.1 billion to cover bad debts a few weeks back, would be the envy of international bankers.

With global losses now about half a trillion US dollars, there are hundreds of banking executives worldwide who would kill for the opportunity of announcing provisions of just $1 billion.

So have we just been lucky? Or could it be that our regulatory framework is far superior to the rest of the world? There is an element of truth to both those theories. But the real answer is that our banks, unlike their American and European counterparts, could afford to be conservative.

From a banker's perspective, Australia has been a goldmine. As one regulator noted yesterday, when you are earning 20 per cent returns on your capital, you really don't need to go off shoving money into risky ventures. Our big four banks have wallowed in fat margins for years, even with competition from non-bank financiers such as Aussie, Wizard and Rams.

Those non-bank financiers have all but disappeared. Anyone now looking for a mortgage has only a handful of options. It's a similar story in the corporate arena. Big companies once could tap directly into global debt markets. Not any more. That option, like the cash, has dried up. Corporations looking for debt financing have far fewer options. So the opportunity looms for even fatter margins.

The best illustration of the conservatism evident at the Commonwealth - and Australian banks in general - relate to investments in Collateralised Debt Obligations, high-yielding debt instruments related to US real estate.

CDOs have become the banking equivalent of bubonic plague, wreaking havoc around the globe.

The Commonwealth bought some in 2003 and 2004 but then sold the lot the next year. In 2006, the CBA considered buying more as every bank and municipal council in the Western world plunged into them. But they were considered too risky. Westpac took the same line and it appears only the NAB was left holding a small parcel.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home