Big four banks' profitability set to grow in 2010

Analysts say Australia's big banks will not face any major foreign threat while overseas operators remain focused on their home markets. Photo / Northern Advocate

Australia's major banks are set to grow their profitability in 2010, as bad debts decline and they leverage the market dominance gained during the global financial crisis.

But don't expect a repeat of the jump in bank share prices of up to 80 per cent seen in 2009, after stocks collapsed in 2008.

This jump was driven by investor realisation that the local banks weren't as at risk in the financial crisis as their counterparts were overseas.

Gains from here on are likely to be slower and in line with growing profits, according to analysts.

The dominance of the major banks is set to continue for at least a year, as overseas banks prioritise their home markets and Australian regional banks and non-bank lenders struggle to gain funding at competitive rates.

The Big Four banks are in "a very dominant and advantageous position", said Tyndall Investment Management portfolio manager Craig Young.

"Their funding position is a lot stronger compared to the regionals or overseas institutions," Mr Young said.

"Profitability is going to improve and bad debt charges are going to come off."

The global financial crisis hit Commonwealth Bank of Australia (CBA), Westpac (WBC), National Australia Bank (NAB) and ANZ with lower profits, mainly because of bad debts.

Share prices dropped to less than half their peak in late 2007 to a trough in March 2009.

But unlike many banks overseas, which collapsed or needed large injections of government funds, the local majors remained profitable and had the funds to increase lending in 2009.

CBA (which owns ASB in New Zealand) and Westpac, following their takeovers of BankWest and St George respectively in 2008, cemented their spots as Australia's biggest and second biggest lenders, driven by their leadership in the home loan market.

"The BankWest and St George mergers were last year's story but you probably saw the impact this year," Austock Securities analyst John Buonnacorsi said.

CBA expanded its market share in home loans to 29.5 per cent by October from 24.2 per cent 12 months before, according to figures from the Australian Prudential Regulation Authority. The increase was due mainly to its takeover of BankWest last December, and partly because the bank captured much of new home loans during 2009.

Westpac's share expanded to 26.5 per cent from 17.8 per cent as it took over St George and also gained new loans.

The Big Four together now have over 85 per cent of Australian home loans, having grown from about 75 per cent in October 2008, and about 82 per cent of all loans, compared with 71 per cent the year before.

NAB (which owns BNZ in New Zealand) and ANZ certainly were not inactive in the takeover market, as they pursued growth in other areas.

NAB is aiming to become Australia's biggest superannuation provider after it offered to buy the Australian and New Zealand assets of AXA Asia Pacific Holdings in December, following its takeover of Aviva's local assets in June.

ANZ pursued Asian expansion with the purchase of some of Royal Bank of Scotland Plc's regional assets in August, then expanded its presence in wealth management by buying out its joint venture with ING Group in September.

Their increased market share would not have been possible if the major banks hadn't been able to maintain their funding, particularly from overseas wholesale markets, something NAB chief executive Cameron Clyne describes as their "Achilles heel". East & Partners, a market research firm specialising in the Asia-Pacific corporate and investment banking market, said in its 2010 outlook that the dominance of the Big Four was likely to continue as funding availability would prevent major challenges.

But East also predicted there would be an opportunity for an overseas entrant, particularly in a specific product area, as business dissatisfaction with the Big Four was widespread.

Southern Cross analyst T.S. Lim said the Big Four probably had two to three years before they faced significant competition.

"It's pricing power, and if you overlay that with increasing efficiencies and the falling bad debts, then the earnings gap will widen [further]," he said.

That doesn't mean that the major bank shares will keep surging.

"We think they've had their re-rating," Mr Buonnacorsi said.

"They've got to earn any further gains."

Westpac, at about 19 times earnings per share, and CBA, at about 16 times, are looking particularly expensive, according to Austock's Mr Buonnacorsi. He favours ANZ and NAB slightly, because the market sent their shares lower on the perceived higher risk, which he said was overdone.

It doesn't change the fact that all four banks are in a strong position, though.

"In terms of business, they've got so much more dominance of market. They can adjust," Mr Buonnacorsi said. "They can choose to be popular or profitable."

* Rollercoaster year

After record highs late in 2007, share prices of the Big Four banks slumped with CBA and Westpac falling to just below half their peak value by January 2009, while ANZ and NAB plunged to almost a third of their peak value by February and March respectively.

NAB added about 64 per cent from its March low to close at A$26.36 on December 24. ANZ jumped 81 per cent from its February low to A$21.47, Westpac gained 66 per cent to A$24.23 from its January low, and CBA more than doubled to A$52.52.

- AAP