Worst to come for banks: strategist

Chris Wood

The worst is yet to come for the big four Australian banks because of their reliance on wholesale funding and exposure to heavily indebted households on both sides of the Tasman, says one of Asia's top equities strategists.

Chris Wood of Hong Kong-based brokerage CLSA said while the big four might have come through the credit crisis relatively unscathed so far, they had vulnerabilities - which was why his firm had continued to rate them a sell since June last year.

Wood, in Wellington yesterday for a series of meetings and presentations, including a meeting with Finance Minister Bill English, told the Business Herald the big four's reliance on wholesale funding was their main weakness.

CLSA chairman Rob Morrison said the banks had lent way beyond their deposit bases, which was why they had turned to offshore markets for 30 to 40 per cent of their funding.

While those markets are no longer frozen solid, as they were in the latter part of last year, they remained difficult and more costly to access.

While both the Australian and New Zealand Governments have offered wholesale funding guarantees to the banks, Wood said the prevalence of such schemes throughout the world actually lessened their value in terms of attracting investors.

While commentators and the banks themselves often pointed out they had run their businesses conservatively and steered clear of the credit derivatives associated with the sub-prime crisis, Wood and Morrison said banks here were more exposed to high levels of household debt.

"Australia and New Zealand are both much more leveraged in terms of household debt relative to incomes.

"You see what's happening in the US, and you have to assume that unemployment goes higher here and in Australia. That flows into the housing market and it's the banks that carry the can."