Growth monster has a voracious appetite

HAVE we created a monster? In the next few weeks, all our banks apart from Commonwealth will deliver their annual earnings figures. And what stunning figures they promise to be.

Along with Commonwealth's already reported $6.1 billion, the big banks combined are expected to deliver a $20 billion earnings bonanza.

Terrific news, except that it has created a problem for investors and taxpayers who now stand behind the banks. All our banks quietly now admit this is about as good as it gets. And for a chief executive, that is one of the most frightening prospects imaginable.

Business is all about growth. Investors want higher share prices and bigger dividends and analysts constantly pore over balance sheets searching for new revenue streams. To stagnate or even worse, contract, is to fail.

But where do you go and what do you do if you have a market completely stitched up, where you have demolished most of the opposition and soaked up all available expansion opportunities?

You look for areas that will increase rewards. Like pain and gain, there is a counterbalance to reward. And it is called risk. Right now our banks are mulling over just how to achieve the next leg in their growth phase. And that is an issue that should concern regulators, governments and taxpayers.

For they are contemplating a quantum leap in their risk appetite in an effort to achieve their ambitions; moves that may well return to haunt the country.

ANZ has made no secret of its plans to expand into Asia. More recently, National Australia Bank has also signalled its desire to expand offshore. The two banking whales Commonwealth and Westpac are yet to announce a strategy.

But to continue growth, all will have to increase their risk profile.

Banking and high finance changed radically in 2008 when Australia and most other countries rode in to shore up the global banking system by sandbagging and bolstering their national systems.

Banks have always enjoyed a special status in the corporate world. There has always been an implicit assumption that our banks would not be allowed to fail.

But in 2008, that became an explicit arrangement, a formal undertaking by the Australian government that it would protect, not just the customers and the deposit holders in the commercial banking system, but the shareholders as well.

This has put banking into a league of its own. Unlike any other company on the sharemarket, bank shareholders now have certainty that their investments will never be worthless, that their companies will never fail.

Commercial banks always had to have adequate capital set aside to cushion losses through the bad times. As part of this arrangement, if they ever met trouble, the Reserve Bank would act as "lender of the last resort".

It was a neat little arrangement that left shareholders exposed but provided certainty for the banking system, to ensure panic would not cripple the economy. Plenty of our banks have gone under. Remember all those state banks? They all failed. It's just that you weren't told about it.

In the early 1990s, ANZ and Westpac teetered on extinction and were given a quiet helping hand. But there was always the possibility they could fail and that shareholders would lose everything. This no longer is the case. By guaranteeing the $100 billion in loans our banks raised offshore in the crisis and by guaranteeing the deposits of savers, the federal government changed the rules.

So, if you were a chief executive of a major bank, faced with little or no growth prospects, what would you do?

It would be tempting to expand into a region or business activity, risky though it might be, that offered high returns. After all, you can't fail. And those pesky investors and analysts are demanding you do something.

The concern now is that the climate in Australian banking has a familiar feel to that of the US in the early part of the decade. American banks, squeezed for growth opportunities, jumped aboard a credit boom in real estate that was fuelled by madness, greed and in some cases criminal intent.

And in an era when the world desperately is looking for ways to de-risk finance and banking, to ensure there never is a repeat of the near catastrophe of 2008-09, it is worrying we may have laid the foundations for a future crisis.

Australian banks have a poor record when it comes to expanding anywhere beyond Auckland. Perhaps it is time investors and regulators looked differently upon our banks and viewed them as utilities reliable vehicles that delivered good yields rather than growth opportunities.