No Banking On The Banks Now
Sun Herald
Sunday July 18, 2004
DON'T bank on the banks for a one-way ride on the sharemarket, the National Australia Bank's profit downgrade has shown.
The banks have been the market's mainstay for a decade, rewarding the patient with annual double-digit price rises and some of the best dividends.No wonder banking analysts fell asleep at the wheel. On the day before NAB chief executive John Stewart's profit downgrade of "10 to 15 per cent lower" which works out at a drop of more than 16 per cent over the year and doesn't count the losses from its foreign exchange fiasco at least two analysts were calling it a buy, in one case a strong buy. Presumably, now that it's 7 per cent cheaper it's an even stronger strong buy.The housing boom and compulsory super payments have been rivers of gold for the banks, but the big dry is setting in.Although NAB has had its own problems, such as the foreign exchange gamble, the reasons it gave for its deteriorating profit outlook apply in different degrees to other banks.The first was: "In our retail bank in Australia we have forgone income and incurred expenses protecting the franchise. This has been successful in retaining customers."It can't have retained too many. And, anyway, banks are fighting for customers like never before.ANZ has cheekily introduced a one-stop form that lets you transfer all your accounts, especially from NAB, to it.For a bank to be losing customers while the cake was expanding was bad enough. Now that the cake is still, and might even shrink as the property downturn takes its toll, all the banks will suffer. The second reason given by Stewart for NAB's troubles was "a number of short-term initiatives to meet financial targets which impaired our ability to fully leverage investments".Translated, this means oops, we overdid the cost cutting and now the pips are squeaking. Again, a problem for all the banks.Third was "non-discretionary compliance driven expenditures associated with Basel II and the international financial reporting standards". Whatever that is, you can be sure it's not confined to NAB.With the exception of internet tip sheet Fat Prophets, analysts think the banks will continue to deliver for another year. But then what?Fat Prophets, which called NAB a sell more than a year ago, predicts a 20 per cent drop in bank share prices, based on its prediction of rising interest rates.Strange as it seems, the banks don't thrive on high interest rates. That's because they mean lower economic growth and less lending.There are arguments on either side for a rising or falling bank share price. But the moment of truth will come when interest rates rise. Analysts cite the banks' fully-franked dividends as a natural floor for their prices. Super funds and mum and dad investors are attracted because dividends can be worth up to 7 per cent after taking franking credits into account.But this doesn't guarantee more price rises, especially as profit growth becomes more sluggish.The exit of News Corporation to the US is the wild card for the banks. If the big end of town replaces News stock with that of the banks, next biggest on the stock exchange, then that will be a fillip.Meanwhile, prices between the banks may move further apart, especially as they attack each other for customers.Smaller banks, especially St George and Bank of Queensland, are well regarded by analysts. Westpac is the favoured big bank. As for NAB shareholders, one broker said the shares were unlikely to drop below $28, or rise above it either.WHY BANK SHARES COULD RISE* More share buybacks are on the cards* The economy is booming* Fees are a pot of gold* Banks are predicting 8 to 10 per cent profit rise* Pay big dividends with tax breaks* Good assets* Super/wealth management market just gets bigger* News Corporation's exit will mean more funds buying bank stocksWHY BANK SHARES COULD FALL* Interest margins their bread and butter are falling* The home-lending boom is over* Interest rates may rise * Run out of branches to close and staff to sack* Intense competition* Lose control of customers to mortgage brokers* High household debt rings alarm bells* Navel gazing: each bank has its own problems
© 2004 Sun Herald