Bank earnings likely to slow down through higher funding costs

MELBOURNE: Higher funding costs and weaker margins have prompted the market to call the end of the big banks' post financial-crisis earnings spurt and to expect lower fiscal 2010 profits.

But not all players agree the good times are coming to an end for the big four - ANZ, Commonwealth Bank, National Australia Bank, and Westpac.

Six months after Westpac's controversial 45 basis point interest rate rise to loans, political pressure regarding rates is likely to prevent the banks from passing on higher funding costs to borrowers before the federal election.

The risk of a margin and earnings crunch is higher than in December, courtesy of higher wholesale term funding costs driven by Europe's debt crisis and slowing deposit growth, despite the decline in bad debt charges.

"Banks' ability to pass these [pressures] through to borrowers has been inhibited by substantial political pressure, especially in mortgages, with the banks effectively prohibited from repricing pre-election," UBS analyst Jonathan Mott said.

Fat Prophets' chief executive Angus Geddes said the debt crisis had put upward pressure on interest rates, which would eventually be passed on to Australian consumers.

"You've also got the dual headwind of the housing market actually slowing down," he said.

"We don't think that housing prices in Australia are going to crash, but we do think that credit growth is going to slow."

Worries over an earnings crunch prompted analysts to downgrade bank stocks last week.

These followed downgrades from six brokers in May after a lacklustre first-half earnings season with lower margins and weak outlook statements.

UBS cut its fiscal 2010 earnings estimate by 1 per cent for the big four as net interest margins fall.

Credit Suisse agrees margins have peaked and CLSA Asia-Pacific says inflated earnings have had their day.

Europe's sovereign debt crisis has driven wholesale term funding costs higher, making it more expensive for the big four to refinance A$78 billion due in the next 12 months. Tougher regulatory capital and liquidity requirements from 2011 will also make refinancing more expensive.

- AAP