NZ Tax Bill to hot Australian Banks
Welcome back!
New Zealand has been an unhappy hunting ground in recent years for Australia’s top four banks and it seems to be the case again with the big banks looking at a AUD$1.9 billion tax bill after a ruling by the New Zealand High Court.
The decision was against the National Australia Bank regarding sic structured finance transactions. While an appeal is a given the NAB are looking at needing to raise capital to cover the $550 million approx provision.
Justice John Wild said the transactions had “no commercial purpose or rationale”, other than to use the bank’s tax capacity to generate exempt income. The decision puts not only NAB but CBA, Westpac and ANZ on a collision course with regulators and a similar outcome.
It would seem ANZ and Westpac have adequate provisions already in case whereas CBA was less clear.
Australia’s Big 4 AA Rated
Australia’s Four Pillars in the banking sector has stood up amazingly well in the face of the global recession with the Commonwealth Bank, ANZ, Westpac and National Australia Bank all maintaining AA rated despite the global slump.
The big four remain as only eight international banks rated AA in the world.
Commonwealth Bank and Westpac dominate rival Big 4
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?
Westpac leads in Australian banking sector
Westpac showed why it’s the most highly regarded Australian bank with a solid $2.18 billion profit amid a rise in debt provisioning to $1.6 billion on an increase in bad loans.
The interim result to 31 March indicated the rising bad debt impact on Westpac as has recent results for all the major banks. Gail Kelly the CEO of Westpac indicated that the economy was likely to worsen but Westpac was well prepared for the tougher conditions ahead.
Westpac anounced a cut to the first half dividend from 70c to 56c to preserve capital in what is stil very tough banking conditions. Of particular concern to Westpac was the increase in provisions of $156 million in the margin lending operations. In a positive, Kelly indicated the margin loan book had been reduced from $6.6 billion to $4 billion indicating this was managed well.
After seeing all the results it would appear Westpac delivered the best result overall and appear to be well supported by the strong focus on Australia but while they are managing risk what are their growth plans?
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.
Westpac suffer rise in bad debts
Westpac this week revealed a dramatic rise in bad debts in the first quarter as the economic gloom hits the domestic economy and arguably the best placed Australian bank to deal with the economic crisis.
Westpac revealed a rise from $144 million to $800 million for inpairment costs resulting from the economic crisis from levels a year ago. Westpac had an bad debts of $360 million alone from three major companies, $300 million alone was from Babcock and Brown.
Westpac revealed a strong rise in revenue in the first quarter amid rising deposits which have helped reduce funding costs. The focus in increasingly turning to which bank will be the first to cut dividends. Such a decision will be punished by investors as shareholders have become use to receiving increasing bank dividends year on year.
Westpac are still perhaps best prepared to at least maintain dividends but neither bank will want to dip into capital to fund dividend payouts in such an period of credit deterioration.
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.
Will investors snap up Westpac at $16?
With the Westpac share purchase plan due to close on 30 January 2009, questions are beginning to mount on whether investors will fully subscribe to the $500 million retail offer.
Investors have started leaving the market again this week after a promising start to 2009 but the global crisis has started to bite hard and the signs for a very tough 2009 for Australia is looking likely.
Households have reduced spending and are tightening budgets as the fear of job losses in the economy increases. Some financial analysts are forecasting unemployment at 9%, against the current 4.5%. If this does not strike more feat into the economy then I don’t know what will.
The question for investors is why invest today at $16 when Westpac may be $13 by mid-year. Westpac closed on Friday at $16.11.