bank outlook deteriorating ... downgrades

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    Bank Outlook Deteriorating - Citi
    FN ARENA NEWS - 09/04/2008

    Citi analysts joined the rush yesterday to downgrade ANZ Bank's (ANZ) FY08 earnings expectations by 7%, following ANZ's announcement of a $350m increase in bad debt provisions. As they did so, the analysts suggested ANZ would not be both the first and last of the Big Five to make such provisions.

    They haven't waited to find out.

    Citing ANZ's move as "evidence of further deterioration in credit quality for the [bank] sector", the analysts have this morning downgraded both Westpac ((WBC)) and St George ((SGB)) to Hold from Buy. Citi no longer has a Buy rating on any of the Big Five, and has a Sell rating on National ((NAB)).

    What is worrying Citi is further evidence of a "genuine economic slowdown" in Australia. In recent days economic data have shown weakness credit growth and retail spending, while yesterday the leading indicator of business conditions as surveyed by NAB economists showed such a collapse in March that even the economists were shocked. And this morning, since the publication of Citi's note, the Westpac-Melbourne Institute measure of consumer confidence for March showed an even more startling result. While business confidence has hit its lowest ebb since December 2002, consumer confidence is at its lowest level since July 1993.

    It is a rule of thumb that RBA interest rate increases do not have a noticeable effect until 3-6 months later. This suggests the February and March hikes have not yet impacted on the "rear window" numbers such as credit growth but are quite apparent in the leading indicators of confidence. And let's not forget the banks' additional increases.

    The only real bulls left among the bank analyst fraternity at the moment are those at GSJB Were, who are still betting that the increased business flowing into the traditional banks following the collapse of the securitisation markets will more than make up for any increase in bad loans. However, Weres' view does come with a caveat:

    "The biggest risk to our forecasts at this stage is a hard economic landing in Australia which would see our provisioning forecasts increase materially".

    Has the RBA pushed too far? Politicians will argue all day that it is not the RBA's fault - it's the banks fault. They are the greedy mongrels who have raised their lending rates even higher than the RBA. Politicians know full well what they're saying is a complete load of rubbish, but they also know it gets a rise out of a naive public. Banks have only raised their rates beyond the RBA increases because their own cost of funding has risen by a significant margin above cash. According to most estimates, the banks have not yet even reached their previous margin levels, and could still raise further. Can banks afford to take a haircut on margins just to be good corporate citizens? Well at the moment they can't even make their own dividend payments out of earnings. It would probably not be a happy day in super-land if one of the Big Five actually went under.

    (They couldn't actually - they'd be saved by the RBA as lender of the last resort).

    The banks no more want to raise their rates at the moment than fly in the air, as evidenced by the incremental step-jumps they've been making. The hope is that an easing in the global credit squeeze will soon translate into an easing of funding costs. But that just hasn't happened. In the meantime, the banks have to watch while credit demand diminishes and cringe as they face the prospect of rationing what lending capacity they do have.

    In the US, the central bank has been madly slashing rates. Yet last night one of America's biggest "thrift" bankers to consumers and small & medium enterprises - Washington Mutual - announced a first quater loss, slashed its dividend, and accepted a capital injection that diluted shareholder capital by 100%. This means that whatever looked like a cheap multiple on WaMu one day ago is no longer cheap at all, and what looked like a great yield isn't either.

    While Australia is not suffering from same sort of subprime and Alt-A mortgage debacle as the US, US commercial banks have access to funds at less than zero in real terms. As Australian banks struggle with the fallout of the credit crunch, such as Opes Prime (and who knows who's next), they have no access to cheap "rescue" funding.


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