Australian banks: Love on the rocks

The blissful early phase of every romance eventually collides with reality. Australian investors have been head over heels with the country's banks and their dreamy yields. Judging by recent earnings reports, though, it may be time for some therapy. "Occasional volatility and shocks", "challenges" and (worst of all) "intense competition" are creeping in. Results may be "solid", but that is not the language of a love affair, is it?

On Wednesday, Commonwealth Bank of Australia's trading update added downbeat verbiage to those of Westpac and ANZ, which announced their numbers earlier in the week. The market was not impressed: CBA's shares dropped nearly 6 per cent, on substantial volume. Its peers slid around 3 per cent in sympathy.

The market may have waited for CBA's report to sell the sector down, but none of the banks' numbers was great. On the asset side, loan growth has slowed as the domestic economy adjusts to the end of the commodity boom. At Westpac, business loan growth of 11 per cent was offset by repayment of maturing debt, BBY Research points out.

Mortgage lending was the sector's bright spot. In the past six months property loans have grown just under a tenth from a year earlier. Yet even this is not great news. Regulators, wary of the banks' homogeneous exposure to a roaring property market, have threatened to increase capital requirements against such loans. So Westpac said it will raise capital, and ANZ is targeting non-core asset sales, to shore up core equity tier one ratios.

The news has been little better on profitability. Only ANZ managed to eke out year-on-year profit growth. Net interest margins declined across the board, in part because of competition (this week, as the central bank cut rates, CBA lifted some of its deposit rates). Customer acquisition and regulatory costs are rising. This relationship is not over, but it is going to take some work.

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