Latest NewsOur Bulging Banks and All That MoneyFriday, 09 September 2016

Whatever happened to Armageddon? Ever since the global financial crisis erupted, the big banks have been soaking up capital at every available opportunity in anticipation of the avalanche of bad debts that would pour through the system. Now they find themselves over-capitalised in an improving environment.

ANZ’s trading update has confirmed what Westpac’s first quarter results signalled. The growth in bad and doubtful debts is tapering and, indeed, were it not for the dire state of the New Zealand economy, might already have plateaued.

Underlying earnings are lifting, all the majors are well-provisioned and all are running capital adequacy ratios that would have been unthinkably conservative before the crisis.

it would appear that the Australian banks have sailed safely through the shockwaves that rolled through the global economy and banking system.

ANZ’s underlying earnings are slightly ahead of last year’s, its provisioning growth has slowed everywhere but in New Zealand and growth in impaired loans, at 7 per cent, is slowing markedly. Even the $664 million of charges it had made against losses on credit intermediation trades are reversing as global credit markets and spreads recover, and now sit at about $125 million.

It would now appear that loan losses will peak, at levels significantly lower than were envisaged only a few months ago, and be retreating before the end of this year. Even ANZ’s Mike Smith is now talking about "cautious optimism" and saying that the group’s watch list of potential problem loans is showing early signs of shrinking. Westpac’s Gail Kelly referred to encouraging signs in her portfolio.

Having re-priced their commercial loan books and experienced solid volume growth as they fill in the vacuum left by the demise of the non-banks and capital constraints of the surviving regionals, the majors are very strongly positioned for more stable economic settings.

In fact, they may be too well-positioned. ANZ, after its recent acquisition of some of Royal Bank of Scotland’s Asian assets, has a tier-one capital ratio of 10.2 per cent. While Smith is still on the prowl for Asian banking assets, that is a remarkably conservative capital position. The other majors are also conservatively capitalised and provisioned.

There is still a considerable amount of uncertainty surrounding future regulation of the global banking industry and the amount of capital banks will be required to hold in future, although it is almost certain that they will have to hold more in future than they have in the past.

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

By any measure, however, unless there is a second wave of shocks and loan losses

ANZ, with its Asian ambitions not sated, and the possibility of buying ING out of their wealth management joint venture strengthened by ING’s problems, probably needs to maintain surplus capital.

Unless there is another dimension to the crisis, however, by the end of the year all the majors will be starting to think, not of when and how to raise more capital, which has been their preoccupation over the past year, but when and how to give it back.

– and the listed corporate sector now has an extra $100 billion of freshly-raised equity of its own to cushion the impact of any further downturn -- the local banks are sitting on a lot of excess capital, while still generating organic capital through their solid and stabilising profitability.