the tides they are a turnin warns nab
The tides they are a turnin', warns NAB COMMENT Matthew Stevens November 04, 2006 A YEAR ago John Stewart said it was a great time to be a banker in Australia. Yesterday, while celebrating NAB's latest record profit as a "turning point" in its recovery, the ever-affable Stewart hinted the tides might be turning. These might be dangerous times. Stewart is not alone in his nascent caution. The changing competitive state of banking in Australia was one of the themes that threaded through this latest profit season.
The financial commentariat loves nothing more than picking the winners and losers of the four-way race that is Australian banking. But our indulgence sometimes obscures a now central reality: after nearly a decade of pain and instability, each of the Big Four is pretty much a world-class operation with fiercely strong financials.
Paradoxically, it is the coincidence of their collective rude health that has Stewart seeking investment discipline from his newly confident troops.
Yesterday Stewart declared the NAB was "seriously back in the game" and ready to pursue growth. Across town the Commonwealth's Ralph Norris told shareholders he was looking for better than system growth. A day earlier Westpac's David Morgan said he wanted double-digit earnings growth. And just over a week ago ANZ's John McFarlane opened the reporting season by raising the bar for his bank's 2007 performance.
Each bank is on the march to match or better system growth. Two have indicated double-digit improvement is where the market system will be at.
Each bank has accepted there will be further margin compression over 2007 as they seek revenue growth and market share. At the same time, each has warned of weakening credit growth and acknowledged they are working in a very mature banking market place.
This point has been taken up by Ernst & Young which, only hours after Stewart finished talking, published a timely review of the results season.
"In their pursuit of market share it is yet to be seen whether the banks appetite for greater risk has gone too far but, with an impending interest rate rise, this may become clearer."
The report notes margin pressure is the product of both finer lending spreads and increased competition in the deposit market with "banks having to pay more for their traditional retail deposits".
In part, the emerging edginess about the Australian marketplace is generated by the first consistent signs of fractures in our economy.
All the banks are focused intensely on the rising delinquencies in the unsecured credit market. Yes, they are only returning to historical norms. But let's just hope that is where they stay.
"Everyone is waiting for the bell to ring on asset quality," NAB CFO Michael Ullmer said yesterday.
The delinquencies trend is consistent and the epicentre of the pressure is NSW. The fear is that the rising delinquencies in credit card debt in particular is indicative of wider financial distress in Australian households and that stress could yet infect the mortgage and business markets.
Currently no one reckons that is happening and, again generally, the bank results consistently show mortgage and business delinquencies at historic lows.
In the mortgage market, that situation will hold while unemployment remains low. Whether the business market will remain as robust though is not so clear. Certainly, if consumer spending becomes constrained by the same pressures feeding 90-day delinquencies in the unsecured credit market, business lending might well be headed for a hard time too.
But again, there is no sign of that. NAB, just to offer the most immediate example, yesterday reported business deposits has risen 31 per cent in 2006 over banking system growth of 11 per cent. Business banking, in short, is booming.
Indeed, it is likely to be the next big point of contest for Big Four. Which could be pretty exciting for customers.
NAB Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
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