Banks Called To Account
The Sunday Age
Sunday May 2, 2004
Australia's banks face a downturn in profits. What strategies might they adopt to survive in leaner times? John Synnott reports.
After a decade of plenty, the astronomical growth of Australia's major banks appears to have peaked, and there looks to be only one way ahead - down.
ANZ might have reported a record $1.4 billion half-year profit during the week, but the signs aren't good. Interest rates look likely to rise, meaning lower bank profits. Mortgage numbers are topping out as the housing bubble deflates, so there is little sign of growth for the major banks there, while fee rises must be near their limit.
So what will take the place of these business streams as key drivers for profit growth? After several banks almost went broke in the 1990s, they have been careful to control costs, closing a third of branches and reducing staff by 20 per cent. They also ``de-risked" their loan portfolios, switching from the higher margin corporate loan business to personal lending, which has a relatively low margin, is very competitive and requires volume.
``They can't go back to that corporate business as in the past, because companies went to other markets as the debt business is now much bigger in Australia," says AMP economist Shane Oliver.
There's a war out there if the banks want to continue growing. Some battlefields include:
Bank branches
When the internet was in vogue, branches looked like going the way of the dinosaurs. Now branches are back in fashion, with ANZ talking of opening more.
Customers are ambivalent about branches and hate the queues. But if banks struggle to squeeze more profits out of customers, the only way to keep them is to make them happy.
This means giving customers better, personal service.
``What about more weekend or even night opening hours, like in parts of America, or just adding the convenience of closing 10 minutes later or opening 10 minutes earlier?" says Macquarie Equities senior analyst William Ammentorp.
This would involve a significant attitude change over the past decade, when the tale was of bank cost cutting, branch closures, centralising ``back office" procedures and making staff redundant, particularly in middle management.
Cross selling
Investment products were supposed to be the future for banks as baby boomers headed into retirement. But the verdict so far on the big takeovers in this area is that they have been disappointing. Still, it is early days.
The less-than-stellar success of cross-selling ``wealth management" products has been blamed on a clash of cultures - banks are risk-averse, investment houses are selling risk.
Regional banks
Bendigo Bank is the fastest-growing financial services business in Australia. The Bank of Queensland (BoQ) plans to open 100 branches in NSW and Victoria by 2006, while regional and non-bank mortgage originators took the most profitable mortgages last year, according to Macquarie Equities.
Small banks are nimbler and quicker than the big boys, according to Perth-based BankWest. It is growing organically, backed by the giant Halifax Bank of Scotland, a sign that banks globally are getting bigger and want to come to Australia.
These regional and community banks are nicking good staff from the majors. ``It is all about relationships with the customers, and with a small bank, you can do that," says BankWest's business solutions boss, Jack Dykes. Credit unions are also in there circling the big banks, looking for weak spots.
Small business
An unseemly fight between lenders is brewing for the business of small and medium-sized enterprises (SMEs). As housing slows down, non-bank mortgage providers will look elsewhere to keep up growth. One target will be the 80 per cent of loans where homes or other property are put up as security by small business.
``The most intense competition seems to be in small business lending," Mr Ammentorp says. ``We would not be surprised to see this market end up like mortgages - very competitive, multiple products and providers, and thinner pricing."
Fees and charges
Banks have achieved double-digit fee increases every year for the past five years from each major customer group: consumers, SMEs and big corporations. ``You can't keep doing that," Mr Ammentorp says. ``The pressure is on, especially when overseas markets are seeing fees decline."
It's rare to pay an annual fee on a credit card in the UK. US banks do not charge fees when you withdraw money from another bank's ATM. ING Direct-style high-interest, no-fee deposit accounts have shown banks how successful a low-cost model can be. Rising interest rates attract savings, so expect the battle for deposits to pick up in the next couple of years.
Still a solid buy
Investors see banks as a less compelling buy than they used to be, but analysts believe the major banks will continue to pay healthy 5 to 6 per cent dividends and deliver similar growth in share price to 2003. But of course there are risks.
If the housing cycle turns down savagely, bank profitability will go backwards for a while. So will building materials and consumer discretionary stocks, as consumers concentrate on repaying their debts.
Banks remain a good long-term investment, according to Investors Mutual, one of Australia's best managed funds.
IML portfolio manager Monik Kotecha says rising interest rates hurt banks, but not at the start of the upswing. ``We believe all the major Australian banks are currently attractively priced and represent very good, sound, long-term value. They have the qualities a value manager like IML looks for in a business," he says.
``They have strong market positions in a concentrated industry, they have recurring earnings streams and have the capacity to grow their long-term earnings as the economy grows and credit demand grows."
© 2004 The Sunday Age