CBA 0.89% $84.77 commonwealth bank of australia.

potential effect of sars on banks

  1. 5,316 Posts.
    2 interesting articles which are quite negative for everyones.

    Banks' days of stellar earnings growth look finished
    By Stephen Bartholomeusz
    April 25 2003

    The ANZ result failed to excite the market yesterday. That was not surprising because, for one of the few periods in the 51/2 years since John McFarlane has been chief executive, the result wasn't very exciting.

    The bank might have "snatched defeat from the jaws of victory", as McFarlane put it, by incurring a $27 million charge for under-accruing credit card loyalty points in prior years, yet even without that blemish the result would be solid rather than impressive.

    ANZ shareholders are not used to single-digit profit growth. They will probably have to get used to it: the bank's full-year growth forecast is about 8 per cent and something similar in 2004.

    They won't be on their own. National Australia Bank has flagged growth in cash earnings per share of about 8 per cent this year, broadly similar to ANZ's performance. It is unlikely Commonwealth or Westpac will do any better.

    The relatively modest nature of the banks' performances seems incongruous when set against the backdrop of the records being set in levels of household credit and the generally favourable economic environment.

    It was noticeable in the ANZ result, however, that although its core domestic banking operations generally produced respectable March-on-March gains, volume and profit growth have slowed in the past six months.

    The housing market might still be very active, but the growth has tapered and in that market the emergence of mortgage brokers as a force has intensified competition and compressed margins. Last week's annual Reserve Bank analysis of bank fees indicated that the growth in fees from personal and commercial banking is also slowing.

    The ANZ's net interest margin in its personal banking division continues to edge down, as does the overall group net interest margin.

    The profitability of ANZ's card business, which has been one of its star units in recent years, was not only harmed by the $27 million charge in the last half but it will also be reduced by as much as $40 million in 2004 by the RBA-imposed reduction in credit card interchange fees.

    ANZ has the smallest funds management and insurance exposure of any of the big banks and therefore has not been as badly affected by the effect of the steep decline in global sharemarkets on net inflow and the valuation of wealth management operations. Even so, the $7 million contribution from ANZ's share of its funds management joint venture with ING is a meagre return on the $1.6 billion the bank has tied up in the venture.

    With the economy slowing and with margins under pressure, the banks seem to be moving into a more subdued, even more competitive era.

    ANZ, like its peers, remains a high-returns business. Banks, given the leverage in their balance sheets, ought to achieve high returns on capital.

    ANZ's return on shareholder capital, however, has slipped from 21.6 per cent in March 2002 and 24.8 per cent in September last year to 20.3 per cent. With McFarlane disappointing the market by not announcing a share buyback - despite the bank being the most soundly capitalised of the big four - for the moment the erosion in returns looks like a trend rather than an aberration.

    The bank's decision to substantially lift the interim dividend and foreshadow a progressive increase in its payout level from the current 61.3 per cent towards the high 60s percentage level suggests that the board and management are also unexcited about the outlook.

    The more positive aspects of the result were the continuing improvement in credit quality, despite ANZ's well-publicised (but rapidly reducing) exposures to large corporations in the US and UK, its continued discipline on costs and the strong growth in deposits and accounts in the personal bank.

    The latter represents an element of a multifaceted strategy that McFarlane has developed to differentiate the bank and overcome what he regards as the long-term limitations of the domestic market.

    In retail banking, ANZ has punched above its weight in some segments but generally has the weakest overall position of the big four. Its strategy, which carries a near-term cost, is to compensate for its lack of scale by competing on price and products and exploiting its relative efficiency. ANZ's cost-to-income figure has fallen 20 basis points to 45.6 per cent during McFarlane's tenure.

    It is trying to buy share to boost volumes across its network, which it plans to expand by opening another 25 branches. The strategy, which comes at some cost to profitability, seems to be producing early gains, with net new accounts up 229 per cent in the half.

    Another element of the long-term game plan is a careful - but at this stage modest - expansion in Asia, mainly by partnering local institutions.

    Those are strategies with time horizons probably measured in decades, not years. It highlights the long-term problem of achieving superior growth in a low-growth and mature market, an issue that will also confront CBA and Westpac.

    ANZ's relatively small retail market share, distinctive strategies and the technological capabilities it has developed in key market segments ought to make it easier to achieve above-system growth if it executes effectively.

    With the system growth and the economy slowing, with margins under pressure from increasing competition from non-banks and the low-interest rate environment - and the probability that, even if the markets stabilise and produce positive returns for investors, wealth management is unlikely to deliver the level of returns envisaged at the height of the bull market when most of the bank acquisitions occurred - the banks seem to be moving into a new, more subdued and even more competitive era.

    Bank shareholders might have to get used to less exciting results and bigger dividends as the growth dwindles in the domestic system, and in the levels of retained capital required to support that growth.

    [email protected]

    The cough heard around the world
    April 25 2003

    As nations ready to handle an outbreak of severe acute respiratory syndrome, Keith Bradsher reports on how the disease is already affecting small industries worldwide.

    Michael Glynn rested barefoot on the deck of his fishing boat at the dock in Port Douglas, Far North Queensland, after unloading his catch, and talked about how an outbreak of disease 5500 kilometres away had wrecked his livelihood.

    Restaurants in Hong Kong, by far the biggest buyers of live Australian reef fish, stopped buying four weeks ago when severe acute respiratory syndrome, or SARS, prompted diners to stay home in large numbers. The restaurants have barely bought any since, and fish prices have collapsed.

    "A lot of the guys have thrown their arms up and stopped fishing," says Glynn, who had to go out fishing anyway for three straight days and two nights on the Great Barrier Reef because he has just bought a house. "The mortgage won't go away."

    The troubles of Great Barrier Reef fishermen, who operate Australia's largest fishing fleet, show how even small, out-of-the-way industries are feeling the effects of SARS. The disease - and more importantly, fears of the disease - is causing measurable economic and commercial harm around the world, particularly in parts of the Asia-Pacific region.

    SARS is causing the worst economic crisis in South-East Asia since the wave of bank failures and currency devaluations that swept the region five years ago. The economies of Hong Kong, Singapore and Taiwan have not just abruptly stopped growing but have begun shrinking; the economies of Malaysia and Thailand are probably next, and even China's booming industrial expansion is beginning to slow, says Andy Xie, an economist with Morgan Stanley. "Outside of China, the whole region is contracting because of this crisis," he says.

    With nervous customers staying away from stores and restaurants in areas where cases have been reported, and travellers cancelling or postponing trips, industries that offer services to people, from restaurants and hotels to airlines and cinemas, are being hit particularly hard. Also hurting are suppliers to service industries, like Glynn and NAV Canada, which plans to start charging more for air navigation services partly because SARS is cutting the number of flights.

    Other heavily affected industries involve those that make discretionary products, especially luxury goods, rather than necessities.

    With fewer than 5000 cases of SARS reported worldwide, manufacturing companies are so far experiencing little or no disruption at their factories but face thinning order books as buyers stop attending trade fairs and commercial events.

    In places like Paris and London, executives at luxury goods companies are finding that the grounding of many business travellers by companies afraid of SARS, together with a slump in tourism, has meant fewer sales of Burberry raincoats and other costly items frequently sold at or near airports, hotels and tourist areas.

    "The SARS virus has clearly had an impact on Asia, with many airlines cutting their capacity," says Michael Metcalf, Burberry's chief operating officer.

    "The Hong Kong consumer has been choosing to stay rather more at home, and not to get out there and shop as usual."

    LVMH Moet Hennessy Louis Vuitton, for its part, has been annoyed by photos in European fashion magazines, including Elle, showing Hong Kong residents wearing masks to protect from SARS that bear fake Louis Vuitton logos.

    By contrast, workers and executives at companies making things such as cars and consumer electronics say there has been little effect so far on production. But the biggest story is that many buyers have deferred orders because of a reluctance to travel to East Asia, even to countries like Taiwan with few reported cases and no deaths.

    Peter Chang, the sales manager for a communications equipment company, has put in long hours in his company's booth at the Taipei International Electronics Spring Show, which opened on Friday, but has made so few sales that he expects his business will produce 20 to 30 per cent less equipment in the six months until the next big trade show. "Most of my buyers didn't come this year," he says.

    Even if the outbreak proves shortlived, the effect is already apparent in travel-related industries around the globe. Hotel occupancy is down to 20 per cent in Singapore and even lower at many Hong Kong hotels, while retail sales have been cut by as much as half in both cities.

    Cathay Pacific, based in Hong Kong, has cancelled two-fifths of its flights, while other airlines with large Asian operations, like Singapore Airlines, have undertaken more modest reductions in service. The Singapore Government has unveiled an $80 million aid package for the tourist industry. Announcing the package, the Government said visitor arrivals to Singapore had dropped by 61 per cent in the first 13 days of this month, and retail sales by 50 per cent.

    The main variable in every economist's calculation of the effects of SARS lies not in the number of industries affected but in how long the outbreak could last - a question that economists, like doctors, are at a loss to predict. Economists must guess not just how long the disease will persist, but also how long fears about the disease will last.

    If the outbreak and related fears prove enduring, one casualty could be the growing integration of the global economy, which has been extending beyond manufacturing to include service industries. Many companies have found gains in efficiency by moving operations to whatever country offers the highest productivity at the least cost, but some say they may have to reconsider these moves.

    Polaris Software, a computer software company based in Madras, India, has been reviewing its recent opening of a data centre in Singapore.

    "Singapore is considered a neutral zone, but with SARS we began viewing the country in a new dimension," says S. R. Ramaswami, the company's head of audits and risk management. "Just as business got used to the idea of the globe being a village, along comes a virus that affects something as fundamental to business as travel itself."

    Polaris is just one among many companies in service industries that need to be available to consumers at all times. SARS is forcing managers in such industries to think about how they would stay in business if one or two employees fall sick and all their co-workers must be sent home for a week to 10 days.

    Financial services companies, from commercial and investment banks to brokerages, cannot afford even brief shutdowns. Regulators in financial centres like Hong Kong require such companies to have back-up sites and elaborate business continuity plans, and some of those plans are being tested now, as institutions like HSBC start using back-up trading floors originally intended as precautions against disasters.

    As financial institutions try to decide what to do if problems grow worse in Hong Kong and Singapore, some are looking to Sydney, partly because of its relatively low cost of living and the fact that it is is only two hours ahead of the two South-East Asian nations.

    Some big banks expanded their back-up facilities in Australia after the terrorist attacks on September 11, 2001. One bank, which insisted that it not be named, has rented three separate offices in the Sydney area that it keeps empty but ready: one near the airport, one in a beach suburb and one in an outer suburb.

    The Macquarie Bank has given Australian employees in Hong Kong the option of coming home, with most doing so. Most banks have been wary of making any move to pull out of Hong Kong or Singapore for fear that doing so might invite retaliation by the governments in either place.

    Some banks have put decisions on moving employees on hold for now because as Good Friday and Easter Monday were public holidays in many former British possessions, including Hong Kong, many bankers have taken last week and this as vacation time. By the end of the month, however, many companies will be assessing whether to begin transferring expatriate employees out of Hong Kong for good if the problem does not appear under control, one investment banker says.

    "You've got most of the expat population offshore already, the families at least, and if this goes on, people will start to say, 'Why don't you relocate me?"' the banker says.

    Some parts of the world are experiencing little economic impact from SARS. In South America, nervousness about the spread of the disease has been growing, especially since Brazil reported its first case - that of a British journalist arriving in Sao Paulo from Malaysia to cover a Grand Prix.

    Meanwhile, operations like Chuk Yuen Seafood Restaurant in Hong Kong's Kowloon have seen little recovery so far. Until SARS hit, the restaurant used to buy 200 live coral trout a month, which arrived by air from Australia in large bins filled with specially oxygenated water.

    The fish, a species of cod that lives among staghorn and brain coral formations on the Barrier Reef, is speckled with blue spots and in beautiful shades of red, pink and brown. The restaurant kept them in some of the 18 aquariums that line its entrance. Following a popular Chinese practice, the restaurant would let customers choose the fish they wanted for dinner. But it has sold only 20 coral trout in the past month and has not ordered any more, says John Yuen, the general manager. "Since SARS, no one has parties any more," he says.

    When Hong Kong health officials announced a new outbreak of the disease a month ago, restaurants and wholesalers across the territory stopped buying coral trout while trying to sell the fish they still had alive.

    After loading his catch aboard a truck in Port Douglas, Douglas Glynn stayed on his boat and recalled that the price at the dock for live coral trout had dropped from $14 a kilo to $6 and then $4.50.

    It has recovered gradually, but is only $6.70 now, a price that barely covers fuel costs. To travel 70 to 500 kilometres to coral trout fishing grounds and bring the fish swiftly back to port alive requires fast, diesel-guzzling boats that are uneconomical for use in fishing for other species.

    So Glynn finds himself struggling to cope with the effects of SARS. "I didn't think that it would be the struggle that it has been in Australia," he says. "And it doesn't seem to be over yet."

    The New York Times

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