Commonwealth Bank and Westpac dominate rival Big 4
Welcome back!
The Australian publised a good article during the week indicating the amazing growth of retail deposits experienced by the merged CBA-BankWest which held a 40% share of retail deposits among the Big Four banks with a $137.1 billion deposit book, and the merged Westpac and St George banks had a 28% share with $98.6 billion.
Both Commonwealth and Westpac held a 68% share of the big four Australian banks retail deposits by March 2009 according to the review commissioned by Brandmanagement.
It was also revealed that the NAB has a $54.9 billion retail deposit book and ANZ a $56.4 billion book.
Which Australian bank has a plan for growth?
The Australian banking sector like the global banking sector has become risk averse and in a time where banks around the world are falling over the Australian banking sector still looks strong.
But if you were thinking a few years out and wanted to invest now, where would you put your money? The Australian banks have mostly followed the same path od de-risking and focusing on Australia so if you were investing you would want to consider what growth options they are aiming to access.
It would appear growth options are limited in Australia but and that NAB, Westpac and Commonwealth Bank all seem to be aiming at Australia for the future both short and long term. ANZ is the only bank that is aiming for a different path, they see growth in Asia as the major driver in the future.
ANZ have a defined strategy under Mike Smith, much like when McFarlane was in charge in the early days at ANZ. ANZ soon took the mantle of the best managed bank under McFarlane and I expect in a few years time people will be singing the praises of Smith.
Asia is a developing region and for business it is an area that needs to be invested in to benefit from growth as opposed to investing in old growth markets of Europe and Australia.
So which do you think is the best Australian bank if you are looking at a three to five year perspective?
Banks cut rates in response to RBA decision
With the RBA cutting rates by 0.25% in April to 3.00%, a 49 year low, the bank gave a clear indication the market is nearing its low in the interest rate cutting cycle.
The RBA is likely to lower the offical cash rate by only another quarter to a half percent before it reaches the bottom of the rates cycle. From that point it will only stay low for a short period it would seem until rates start rising if previous recessions are anything to judge.
In response to the bank cuts Westpac, St George, Commonweath Bank and ANZ all cut their rates by 0.10%, NAB failed to pass on the cut. The decision by the banks gives the RBA some additional margin to cut further in a time when the economy is about to start the early phase of what is expected to be a short and sharp recession.
While all the banks have been under considerable funding pressure the majors have all come through this with a massive increase in market share as the expense of the second tier banks and the non-bank lenders. The majors now have easliy in excess of 90% market share and margins considerly higher then previosuly. Despite the rise of loan defaults the additional margins by the banks have given them a tremendous position of strength that few global banks share.
One thing is certain that the Australian banks are world leading and banks like ANZ who are looking to expand now into Asia are doing so from a position of strength that will setup growth for the next decade.
ANZ announce dividend cut, who’s next?
ANZ have been the first of the big four banks to announce a cut to their dividend as the banks start to feel some of the pain that has devastated the banking sector overseas.
ANZ announced a cut of 25% to their dividend which in direct response to rising corporate debt levels. This will reduce the annual dividend from $1.36 to a little over $1 and will save the ANZ approximately $500 million.
The announcement came as the ANZ delivered an update for the first four months of the reporting year revealing a update on their current operations.
The ANZ have boosted their provisions for bad and doubtful debts to between $2.4 and $2.5 billion, this is broadly in line with industry expectations. Cash earnings were up 18% on the same period last year but the increased impairment costs drove the cash earnings down 11%. ANZ revealed they have been a beneficiary of cash inflows as income growth grew 16%.
One point of note was the 125% increase in the Asian division which CEO Michael Smith has clearly identified as the future of the company. Although the Asian division is still only small the next couple of years will be pivotal in its Asian stategy and they will have to invest throughout the downturn to ensure building a viable market share.
So now the ANZ have cut dividends, who is next? The Commonwealth and Westpac have intimated they may need to cut but I suspect NAB will be next to the table flagging a cut. Either way the coast is now clear and expect all the banks to flag a cut between 10-30% in the coming weeks.
CBA announce $2.57 billion first half profit
The Commonwealth Bank announced a profit of $2.57 billion, a rise of 9% in the toughest banking conditions in two decades for the economy.
The first half profit was a surprising result considering the low expectations for the domestic banking sector which is outperforming the major banks of the world.
CBA have maintained a dividend of $1.23 but flagged that future cuts may be considered based on a deteriorating domestic economy in the second half. With a tier 1 capital of 8.75% the bank is in a healthy position which will enable it to maintain a solid balance sheet but that alone will not stop higher impairment costs going forward.
The result of the remaining banks will be interesting to see if the same message is passed on that dividends are under threat, perhaps Westpac may be in a position to give a succint and accurate assessment of it’s future prospects when it reports.
NAB, Commonwealth & St George join in cutting rates
The National Australia Bank (NAB), Commonwealth Bank and St George joined Westpac and ANZ today by announcing rate cuts to their standard variable rates.
All major banks have now passed on the full 100 basis point cut to consumers.
NAB and Commonwealth have slashed their rates to 5.74% while St George have lowered their rate to 5.89%, the rate changes are effective from 13 February.
NAB and Commonwealth were at pains to point out that future interest rate cuts by the RBA may not be passed on in full to consumers as the demands and pressures on bank margins continue.
Commonwealth Bank in profit upgrade
The Commonwealth Bank surprised the market with a profit upgrade of 20% above market expectations and announced a likely profit of around $2 billion for the half.
The announcement comes on the back of strong credit growth and strong deposit growth. The profit announcement due on 11 February is still likely to be about 16% less than the previous profit of $2.38 million for the December 2007 half but indicate the negativity towards the banks in the market.
The Commonwealth Bank share price surged today on the positive news.
Westpac and ANZ first to cut
Westpac became the first of the banks to cut rates after the RBA announced a cut of 100 basis points to reduce the cash rate to 3.25%.
ANZ followed shortly after announcing a full cut of 100 basis points just like Westpac.
The ANZ and Westpac have lowered their rates to 5.91%. The ANZ announced the cut will take effect from 13 February and further cuts will be passed on subject to funding costs.
As at the time of posting the Commonwealth Bank and NAB have not announced a rate cut..
2008 Bank Consolidation 2009 Non-Bank Oblivion
2008 was an amazing year in hindsight. We saw massive consolidation across the global economy particularly in the once dominant banking sector and perhaps we have or are experiencing the worst financial crisis since the great depression.
Only time will tell on that last one but for Australian banks it was clearly a year of consolidation and a period that has once again tipped the weight in favour of the big four banks Commonwealth Bank, ANZ Bank, National Australia Bank and Westpac.
In fact Westpac was the big winner of the year, now Australia’s highest capitalised bank after their successful takeover of former No 5 St George Bank.
Commonwealth Bank also picked up a few through the year with the latest deal the Wizard Home Loans purchase, they also bought 33% of Aussie Home Loans and swallowed Bankwest.
ANZ Bank consolidated it’s position with new CEO Mike Smith re-focusing the bank on tigher fiscal discipline after early financial setbacks through poor lending practices. ANZ also pressed on with it’s focus on Asia as the future development pathway of the bank.
The National Australia Bank did not sit on it’s hands as it consolidated it’s reputation and focused once again on core business in the light of the continuing deterioration in credit markets.
So what’s ahead for 2009, clearly with the crippled financial markets for smaller non-bank lenders further consolidation with occur. It is also fair to say that the regional banks Suncorp, Bendigo Bank and Bank of Queensland are likely to merge or will be swallowed by the big banks.
2009 will also likely see the death of the non-bank lender. These have been virtually damaged beyond repair in 2008 but will disappear or be bought for a pittance.
One last statistic to leave you with, in 2007 the big four banks had 45% of the mortgage market, at the end of November 2008 it was almost 90%. Don’t expect bank margins to reduce anytime soon.
Commonwealth Bank snatch Wizard from NAB
The Commonwealth Bank have masterfully pulled off an amazing last minute deal to purchase Wizard from under the nose of NAB.
The National Australia Bank had all but sealed the deal when the Commonwealth Bank becked Aussie Home Loans sealed the deal. The Commonwealth will pay $26 for Wizard, a far cry from the near $500 million paid by exiting owner GE Money only 4 years ago.
The deal secures Commonwealth Bank the $2 billion worth of prime residential mortgage’s and offers the potential for another $2 billion worth should they exercise the option.
Aussie Home Loans will buy Wizard’s brand and existing retail distribution network.
GE Money have announced plans to exit the Australian and New Zealand lending market to focus on their core business.