Credit slowdown squeezes earnings

A GLOOMY picture of falling banking sector earnings is emerging in the wake of National Australia Bank's shock move to set aside $830 million to cover investments linked to the US subprime housing loan crisis.

A GLOOMY picture of falling banking sector earnings is emerging in the wake of National Australia Bank's shock move to set aside $830 million to cover investments linked to the US subprime housing loan crisis.

While the immediate focus was the impact of the increased provisions on NAB's balance sheet and the size of the write-down, the bank also disclosed its core lending market was suffering the effects of a sharp slowdown.

Credit growth in both the housing and business sector that drove demand in the first half and helped increase banking sector profits by about 8 per cent has tailed off markedly in the past few months.

This will be reflected in the next round of bank earnings, covering the second half of last financial year, with the first major evidence to be provided by the largest lender, the Commonwealth Bank, when it reports its latest results next month.

But NAB gave a taste of how much lending has slowed when it disclosed on Friday that it was making a larger-than-expected provision against US mortgage-backed securities - called collateralised debt obligations - against it second half profits.

That will hit the bank's full-year earnings by $600 million, and some analysts are expecting NAB to turn in about $3.8 billion in net profits for the whole of last financial year as opposed to $4.38 billion figure for the corresponding period last time.

But that does not account for any fall away in both revenue and profits in the last period of the second half for the likes of NAB and its other rivals such as ANZ, Westpac and St George, which still have two full months to go before they close their books on their accounting year.

NAB's chief executive, John Stewart, who was heavily criticised over way the bank had handled its exposure to the subprime mortgage-backed investments, revealed that lending growth had halved in the past few months from the heights of earlier this year.

The average for growth across the sector has fallen from 14 per cent to just 7 per cent in Australia as the economy cools in the face of higher interest rates and cost pressures on household and corporate budgets.

In New Zealand, which accounts for about a fifth of the big four Australian banks' earnings, the -off has been even sharper.

NAB is facing an additional squeeze, unlike the other four leading banks, in that it also exposed to the weakening British economy.

NAB's shares, in particular, are set to be the target of sellers after Friday's 13.5 per cent fall in value as investors punished the bank for its huge provisioning charge.


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