new credit threat to banks

New credit threat to banks

David Uren and Anthony Klan | March 03, 2009

BAD debts and the global downturn are threatening the credit ratings of Australia's Big Four banks, while new figures show business profitability is suffering its biggest fall in almost two decades.

As Wayne Swan warned that the severe economic downturn faced by Australia's trading partners represented a threat to growth, and the share market tested seven-year lows, credit ratings agency Moody's yesterday issued a warning on three of Australia's biggest banks.

It said the AA1 ratings of the Commonwealth Bank, Westpac and the ANZ were no longer secure. Moody's move follows a similar warning late last year for the National Australia Bank.

Australia's Big Four banks are among the last 12 banks in the world with such a high credit rating.

Bank stocks fell along with the rest of the market yesterday, which shed 2.8 per cent. The S&P/ASX 200 dropped to 3250.1 points, wiping out all share gains since November 2001.

Ahead of the Reserve Bank board meeting in Sydney today, and amid signs that its rate cuts and the Government's stimulus packages might not be able to stave off recession, the Treasurer warned that seven of Australia's top 10 trading partners were now in recession. "This will have a dramatic impact on growth in Australia in the December quarter," Mr Swan said.

ABS figures released yesterday show pre-tax company profits slumped 17.8 per cent in the December quarter, their biggest fall since March 1991, while a business survey by the Australian Industry Group shows conditions for manufacturing have got worse since then.

The figures were released as Anglo Coal Australia announced it would cut 650 jobs from its central Queensland coalmines as it sought to cut costs to cope with the global downturn.

And Melbourne car parts maker Robert Bosch said it would cut 170 staff from its Australian operations because a slump in vehicle sales had slashed demand for its components.

Moody's said the banks' credit ratings could survive a severe downturn, but there was a risk that the damage to the banks' lending books could last for years.

Patrick Winsbury, a senior vice-president in Moody's Sydney office, said: "The negative outlook reflects the potential for the deepening global economic downturn to have a protracted impact on the banks' asset quality and earnings."

Former Reserve Bank governor Ian Macfarlane said the banks owed their strong finances going into the downturn more to good luck than good management, saying the main reason they did not plunge into US-style toxic debt products was because they did not have the spare funds.

"I have no doubt that if Australian banks had a surplus of domestic funds, they also would have acquired a lot of dubious assets, just as many of our counterparts did," Mr Macfarlane said yesterday.

Speaking at an investment conference run by corporate watchdog the Australian Securities & Investments Commission, Mr Macfarlane said lower competition in the financial services market had also helped prevent disaster.

Banks have been protected from competition by the Four Pillars policy, which prevents any of the Big Four from merging.

Banks have often argued for its abolition, but Australian Competition & Consumer Commission chairman Graeme Samuel told the conference that any banks suggesting a merger would get short shrift.

"If someone came to us with a possible merger between two of the Four Pillars, we'd be likely to tell them they were dreaming," Mr Samuel said.

The souring world and domestic outlook strengthens the argument for a further interest rate cut today, but Reserve Bank governor Glenn Stevens is understood to be keen to halt the monthly rate cuts.

The Reserve Bank had been encouraged by improvements in several economic indicators to believe that Australia would be spared the worst of the global downturn. However, the profit figures released yesterday show that retailing, which has benefited directly from the Government's stimulus packages, was the only part of the economy to hold profits steady.

"The Government handouts definitely had an effect, but the rest of the economy is in deep trouble," ABN Amro chief economist Kieran Davies said.

The Australian Bureau of Statistics reported that the volume of goods sold in the December quarter fell by 2.4 per cent.

Business responded to the deteriorating outlook by cutting production and running down surplus stocks.

Economists said the fall in stocks could take the December quarter GDP, which is to be released tomorrow, into negative territory.

Economists say this may force the Reserve Bank to lower rates, already down to a 45-year low of 3.25 per cent, by a further 50 basis points today.

"Events offshore and the very real risk of a sharp contraction in GDP suggest to us that the case for the Reserve Bank to keep its power dry is weak," Mr Davies said.

Business groups are calling for the Reserve Bank to keep the interest rate cuts coming.

ACCI economics director Greg Evans said the rate cuts to date had helped support employment and business confidence, but both remained under severe pressure.

"Business would be disappointed with a rate reduction less than 0.5 per cent," he said.

AI Group chief executive Heather Ridout said there was a strong argument for further rate cuts.

"The big issue for business in this credit environment is that business gets the benefit of rate reductions," she said.

Although mortgage holders have received the benefit of most of the rate cuts in the past six months, little more than half has been passed on to business, with many small businesses still paying in excess of 10 per cent on their overdrafts.

The AI Group's survey of manufacturing is the most up-to-date assessment of the economy before the Reserve Bank board. Its Performance of Manufacturing Index dropped 4.9 percentage points to 31.7 points, well below the 50 point mark which separates expansion from contraction.

Ms Ridout said conditions had deteriorated since the end of the year, with sectors that sell into world markets, such as machinery and metals fabrication, suffering the most.

"The domestic economy is also disappointing, with industries like construction materials also doing poorly," she said.

http://www.theaustralian.news.com.au/story/0,25197,25130627-601,00.html