Banking risks: Wealth management, global asset quality All indicators suggest a relatively robust Banking environment – volumes strong, margins mostly intact and credit issues (other than hotspots like US energy) benign. Unfortunately, the same can’t be said for Wealth Management markets, where FUM growth has contracted and (in the case of CBA) margin & cost ratios have been under pressure. There is little doubt that perceived issues in Wealth Management are continuing to influence major bank share prices – the question is whether or not it is appropriate. Take CBA for example: we recently downgraded the Life Insurance and Funds Management earnings by circa 25%, lifted bank earnings by 1-2% and yet overall group earnings only fell 2-4%. Wealth Management & Insurance earnings at CBA contribute more than twice as much to group earnings than for any other bank and, while we don’t rule out revisions to our Wealth Management forecasts, it’s very clear that perceived issues are more sentiment related than related to significant earnings risk for the likes of WBC (and to a lesser extent NAB). A second risk we tabled in our recent sector upgrade to ‘Neutral’ was global credit risks and, it seems from recent developments, that some of our concerns are increasingly omnipresent. The shares of El Paso, a US Natural Gas Pipeline company, have in recent days fallen more than 25% as investors reacted against proposals to sell core assets to meet obligations on cUS$20bn in debt. In the last year El Paso shares have fallen more than 90%. This is one of several exposures we believe ANZ has in its $9.6bn global energy book, $3.2bn of which was non-investment grade at the time of the FY02 result announcement. Whilst all the major banks in Australia will have some exposure to this relatively highrisk category, there is little doubt to us that ANZ has the greatest exposure. The default rate on sub investment grade debt at the moment is c10%, which would prima facie imply +$300m in prospective losses for ANZ. We believe ANZ’s El Paso limits north of US$100m and believe there is a further +US$30m on NRG (in bankruptcy protection). We calculate ANZ can run down its general provision by a further $400m. ANZ is our least preferred pick of the five major banks – credit concerns, ATO litigation on structured products and ongoing problems with the Qantas co-branded credit card.
