Australia’s big five banks closed yesterday with a combined market capitalisation of $227 billion. And after a 1.1% rally on Wall Street, you’d have expected they would stack on about $3 billion in value today.
Alas, the Commonwealth Bank reported a disappointing 4% gain in net profit to $2.37 billion for the December half and it triggered a rout with the Big Five plunging by between 2% and 5%, wiping more than $10 billion off their collective worth and sending the overall market into the red.
Analysts were tipping a 9% rise so investors are fretting about CBA’s $138 million increase in bad debt provisions and a forecast $100 million increase in wholesale funding costs due to the global credit crisis.
However, as Australia’s biggest bank, the CBA remains phenomenally strong, although its market value has dropped by 4.27% from $65 billion to $62.3 billion in morning trade. To understand that strength, the 113-page presentation for analysts is well worth a look.
While the majority of banks around the world are short of capital, CBA gloated that it has $25 billion of liquidity waiting to be deployed.
CBA is best protected against the credit crunch because it sources 54% of its funding from retail deposits – easily the highest proportion of any bank. Indeed, deposits soared by 12% in 2007 due to what CEO Ralph Norris described as a “flight to quality”. Business deposits rocketed 38% in 2007.
Despite market share gains across the board as smaller rivals falter, the CBA has still been whacked because it was only a matter of time before Australia’s excessive $1 trillion in household debt came home to roost.
All those excessive fees – we’ve copped three $30 overdrawn whacks in the past week from CBA – continue to drive the retail banking business which lifted its half year profit by 8% to a record $949 million. That’s a tidy $5.2 million a day from an operation that now only supports 1,000 branches.
The loan impairment charge inched up to a five-year high, but it is still only 0.2% of CBA’s $350 billion in total loans. As the nation’s biggest home lender, it would be a very different story if we experienced a housing correction like what has occurred in the US, UK, Spain or even New Zealand.
For now, Australia can still claim to have the world’s strongest and most lucrative banking sector, which is another way of saying that consumers suffer the world’s most expensive banking system.
That said, shareholders have taken quite a haircut this morning which isn’t necessarily a bad thing. Financial services companies comprise about 40% of the Australian sharemarket, whereas the global average is just 28%. You can only squeeze the lemon so far and people forget that banks are meant to service the rest of the economy, not capture an excessive proportion of the value by abusing their control over the payments system.
Go here for a discussion about the ALP’s large investments in bank shares.
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