banks earnings outlook slashed

Banks' earnings outlooks slashed

Article from: AAP /
July 22, 2008 12:00pm

A VICIOUS cycle of tightening global credit availability, slowing economic growth and rising bad debts could erase earnings growth at Australia's major banks in fiscal 2009, a brokerage says.
Citigroup today slashed its earnings per share (EPS) estimates for local banks by up to 12 per cent, citing a quicker than anticipated decline in economic indicators.

"Against the back drop of cascading global financial markets, Australian credit growth is slowing rapidly as cost of living increases weigh heavily on the confidence of both consumers and businesses," Citigroup said.

Local banking stocks have been battered in the last six months, prompting some brokers to suggest they represent good value.

But Citigroup begs to differ.

It is recommending its clients sell ANZ and National Australian Bank (NAB) and hold onto, but not buy, the other banks.

"It seems clear the downgrades are really only just beginning for the domestic banks," it said.

Citigroup now expects EPS growth among the banks to be modest to negative in 2009 financial year, with Commonwealth Bank of Australia (CBA) the worst performer with minus 2.0 per cent EPS growth and ANZ the best on plus 1.4 per cent growth.



A global liquidity squeeze triggered by the US sub-prime mortgage crisis has constrained the banks' access to capital.

Banks have responded by tightening their lending criteria, making it difficult for more consumers to access funding.

As lending dries up economies slow, but higher inflation is preventing central banks from cutting interest rates.

Slowing economies cause unemployment to rise and consumer spending to fall, causing rising loan defaults.

Rising defaults constrain bank capital and the whole cycle starts again.

Citigroup noted that local banks, with their cleaner balance sheets and better credit quality, were less impacted by the turmoil in global credit markets.

"However, bank investors are beginning to learn that in the global financial system, all fishes swim in the same pond," it said.

Funding costs for Australian banks are likely to remain higher, forcing them to keep raising interest rates out of step with the Reserve Bank of Australia.

Higher rates will put more pressure on borrowers and combine with a slowing economy and higher living costs to push up loans losses and crimp demand for borrowings.

Citigroup noted that housing credit growth was heading to below 10 per cent a year for the first time since the late 1980's. It has forecast system housing credit growth of seven per cent in fiscal 2009.

Things are set to get even grimmer for business markets, with non-housing credit growth forecast to tumble to four per cent from 15 per cent, the broker said.

Citigroup's pessimistic report follows predictions earlier this month by another investment bank, JPMorgan, that Australia was about to enter into another loan loss cycle, where growth in bad debts outpaces growth in lending.

While volatility in bank share prices is to be expected, JPMorgan believes the sector is still over-valued.

There are other analysts, however, who remain bullish, with UBS today encouraging investors to buy banks.

"Australian banks look to be at compelling valuations following harsh treatments handed out to global banks in recent weeks," UBS said.

UBS doesn't see business credit growth slowing as rapidly because it believes Australian businesses are undergeared compared to their global peers.

UBS also noticed that no new business client "bad boys" like Allco or Centro had emerged in the last four months.

"The bad boy risk is reducing at present," it said.