Australia's banks may have emerged from the global financial crisis with barely a scratch, but their latest bumper profits shouldn't necessarily be taken as a sign that all is well down under.
The biggest danger for the likes of Commonwealth Bank of Australia (CBA) and Westpac Banking Corp is sinking consumer confidence as the country's decade-long mining boom cools and amid signs of a further slowdown in China, Australia's biggest trading partner.
Such fears have made the nation's traditionally conservative bank customers even more likely to hoard their cash, and less willing to take out loans--even after the central bank cut interest rates to a fresh record low of 2.5% this month.
That doesn't bode well for the so-called big-four lenders--including Australia & New Zealand Banking Group Ltd (ANZ) and National Australia Bank Ltd (NAB), whose earnings growth now relies on people having the confidence to borrow more aggressively.
"It's going to get tougher from here," BT Investment Management banking analyst Graeme Petroni said.
"The earnings impetus has slowed and the same's true on the dividend side."
Australia's banks became darlings of the industry as the global financial crisis spread in late 2008 and ate up several big names. Thanks to prudent lending practices, they were able to limit their exposure to the types of toxic loans that brought down Lehman Brothers Inc. and other large overseas financial institutions.
The big four managed to maintain their AA credit ratings even as many banks in Europe and the US had theirs chopped.
Since the financial crisis, the biggest banks have reported a steady stream of record earnings on the back of Australia's buoyant economy that has notched more than two decades of growth, fuelled by industrialising Asia's demand for the country's raw materials.
As that demand has cooled in recent months, Australia's lenders have looked for alternative ways to boost their profit, and support share prices still mostly hovering near record highs. Many have scrambled to shave costs by transferring administrative roles abroad, while hunting for new sources of income by stepping up their push into mainland Asia.
But with the fruits of previous cost savings embedded in their latest earnings, the search for more fat to trim is likely to get less productive and more desperate.
Some of the banks have welcomed the trend of falling bad-debt charges across the industry as cautious customers spurn riskier credit. Still, that may offer little more than temporary comfort since future earnings will now be measured against a lower base of sour loans.
National Australia Bank, the most business-customer focused of the big four, this week rounded out another record reporting season for the nation's lenders with third-quarter net profit of $A1.70 billion, up 40% from a year earlier.
Last week, Commonwealth Bank of Australia, the nation's largest lender by market value, said cash profit--a measure that excludes unusual items--rose 10% to a record $A7.82 billion in the year through June. At Australia & New Zealand Banking Group, cash profit in the nine months through June jumped 11% to $A4.8 billion.
"Earnings appear to be more optimized than ever at this juncture, leaving limited scope for positive earnings surprises near term," Credit Suisse analysts said in a note to clients last week.
National Australia Bank's strong profit rise was supported by gains linked to its hedging against fluctuations in interest rates and currencies. The lender also benefited from a reduction in bad-debt costs at its ailing UK operations.
Commonwealth Bank's chief executive, Ian Narev, said Australia's economy was "fine," but then spooked the market by saying he took a "conservative" view of the country's future amid slowing Chinese demand for Australia's commodities.
In another ominous sign, ANZ, the most advanced in its Asia strategy, said margins at those overseas operations, which account for about a fifth of the lender's revenue, were shrinking.
White Funds Management managing director Angus Gluskie said the banks often play down the prospect of making higher profits because they don't want politicians to hit them with increased levies or limit their pricing power.
"Nevertheless, we remain in an environment where the banks are likely to experience low rates of loan growth relative to history," Mr Gluskie said.
An outcome to Australian national elections next month should remove some political uncertainty and support consumer confidence. It is also widely anticipated that China will experience a soft landing, and that record-low interest rates in Australia will breathe some life into the housing market.
Even so, BT Investment's Mr Petroni said it was unlikely that demand for credit would gather much steam in the coming period.
"Regulators won't let house prices race away, households are still needing to reduce debt, and whoever steps into power still has budget pressures to handle," he said.
"It's hard to see general confidence coming to save the banks."