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party's over, bank on it

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    Party's over, bank on it
    By Alan Kohler
    September 20, 2003

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    For the past 10 years Australia's banks have been perhaps the greatest productivity machines the nation has ever seen.

    They have consistently improved profit margins 2 or 3 per cent a year by cutting staff and holding up revenue with fee income as interest margins shrink.

    And, despite a lot of heat and noise, they have done it with little genuine customer backlash, simply by herding them onto the phone then the internet.

    Yesterday the CBA set up the next three or four years of the 3 per cent annual staff reduction that investors have come to require with its "Which New Bank" program. But it's nothing especially new. Chief executive David Murray is merely trying to catch up to the others, in particular Westpac and ANZ, having fallen to the rear of the field on productivity in the past few years.

    NAB's CEO, Frank Cicutto, launched his own catch-up, called "Positioning For Growth" (PFG), two years ago. PFG is still going, but these days within the bank the letters stand for "Protecting Frank's Gonads".

    Now David's need protecting too, with 3700 souls for the chop. Better their gonads, of course, than his, although the market's sour reaction on Thursday suggests that Murray might be advised to wear a cricket box to work.

    All the action in banking - CBA's new cost-cutting sprint, NAB's stalking of AMP, ANZ's stalking of National Bank of NZ, and Westpac's, er, well it's reappointment of David Morgan - come at crucial time for Australia's superannuation savers.

    Over the past 10 years, these four have outdone the rest of the stockmarket by between two times (CBA) and 3 times (NAB). As a result of this they now represent, as a group, 34 per cent of the market, up from just 13 per cent 10 years ago.

    Thus the phenomenal productivity of the banks over 10 years, combined with their cartel-like pricing power, has led to the situation where an eighth of Australia's private retirement savings is invested in their shares (34 per cent of 36 per cent - the current average super fund allocation to Australian equities).

    According to Rainmaker, the total super pool is now $543 billion; 12 per cent of that is $66 billion. That, as it happens, is half of the aggregate market capitalisation of the four major banks. The banks now account for 45 per cent of all super funds management as well, so it turns out these four companies actually look after about 22 per cent of their own share capital. But that's another story.

    The most important decision now facing investors, including themselves, is: what to do about the banks?

    They have been wonderful investments for 10 years; they still yield 5 or 6 per cent tax-free; they are all still well managed. But the party is probably over.

    The board of last year's top-performing super fund, the Host-Plus industry fund, met on Thursday to consider a recommendation from management to reduce allocations to banks and were still debating it when we went to press on Friday night.

    The fund's asset consultant, JANA, whose clients took all the top places in the performance tables in 2002-03, hasn't yet made a firm call to clients to go underweight bank shares, but is thinking about it. Chief executive Ken Marshman says the high weighting of the banks in market portfolios is an issue, but that they are trying to get a better understanding of the bank profits and their exposure to the property market. JANA is a subsidiary of NAB these days.

    In any case, most fund managers are already in the process of going underweight financials (ie, defensives), and overweight resources and international stocks (ie, cyclicals), to catch the global upturn.

    And even the most optimistic investment strategists are beginning to feel edgy about the Australian property market. Even the IMF is ringing the bell.

    The most extreme bear on Australia is probably ABN Amro's Gerard Minack. "I think we're absolutely buggered," he says. As with many fund managers and their bank holdings, it's the imbalances that he's worried about.

    "Households are more leveraged than they've ever been and we now have a lower savings rate than the US. The only question is whether we come out of this bubble straight into recession, or whether we muddle along with several years of sub-par growth," Minack says.

    If he's right, then not only are the banks too expensive - notwithstanding their "dynamic provisioning" policy, which has taken overall bad debt provisions to 1.5 times current impaired assets - the whole Australian market is expensive and heading for a very difficult couple of years.

    Alan Kohler presents the finance on ABC News. [email protected]


 
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