THE DISTILLERY: ANZ's D-Day

It's Mike Smith's big day. ANZ Bank's solution to the circus that enveloped the last interest rate cut from the Reserve Bank – delaying its own decision until the second Friday of each month – is looking less like a master stroke and more like Smith is taking one for the team. All eyes are on ANZ, and ANZ alone. The Sydney Morning Herald's Elizabeth Knight says Smith should simply highlight the latest results from rival National Australia Bank that illustrate loans being written now are loss-making for his case to hike rates. Although, as The Australian's Glenda Korporaal points out, Smith will be the most hated bank boss in the country until the other banks follow suit, and they might wait just long enough for the heat to die down. Meanwhile, The Australian Financial Review's Tony Boyd says Telstra boss David Thodey might have found one of those crucial growth businesses he needs to protect the company's 8 per cent dividend for the long-term.

But first we start with The Sydney Morning Herald's Elizabeth Knight who says ANZ need only point to the latest results from rival NAB for justification to raise interest rates.

"The details of the NAB result provides evidence that the margin between its borrowing costs and lending rates is being seriously squeezed. Not the kind of margin compression that undermines its financial strength, but the type that demonstrates that the new mortgage loans it is writing are loss-making. If one looks at NAB's online offering on deposit rates and term deposit rates there is only a slither of margin between them (13 basis points). Given there are plenty of costs associated with establishing a loan it is easy to see how new loans at present are loss-making. Make no mistake, the financial fortunes of NAB – and the others for that matter – are not just about this mortgage rate/deposit rate arbitrage. The banks have other sources of funds which are generally more expensive thanks to the European sovereign debt meltdown."

The Australian's Glenda Korporaal says the proximity of the RBA's last decision and the move by Bank of Queensland to keep rates unchanged makes things particularly awkward for ANZ.

"If the ANZ were to respond to its increased cost of funding by announcing a small rise in mortgage rates and small business rates today, it could find itself left out to dry if the other big banks did not follow suit. It would incur the wrath of Treasurer Wayne Swan and see its brand trashed in the market for political purposes by a government desperate to make whatever political capital it can out of bank bashing. The most astute move would be to wait for the next RBA meeting in March, which is widely expected to cut rates by 25 basis points. The option would then be to decide whether to pass on only part of the cut. It shouldn't be this way.”

Korporaal goes on to argue that Canberra's use of political power to influence lower interest rates on mortgages only serves to reduce the amount the banks can lend out. Indeed, but businesses of all stripes have to run at a loss during tough times; how come banks are permitted immunity from the colour red? The banking industry would respond that they're not obscenely profitable if you look at the return on equity figures. However, The Sydney Morning Herald's Jessica Irvine says the risk the banks take on is far lower than other industries with similar ROE numbers.

"High returns on equity tend to be reserved for companies undergoing a cyclical boost such as mining (BHP Billiton had a return on equity of 38 per cent and Fortescue Metals Group 75 per cent), embody a high degree of human capital or intellectual property (like the websites Seek at 31 per cent or carsales.com on 54 per cent) or producers of patented goods (Cochlear, 5 per cent). Banking, by contrast, ain't exactly rocket science. It's a very simple process of buying low and selling high. Borrowing at a certain rate, lending at something higher and sitting back to collect the interest. The potential for innovation is low, on par with, say, a utility. Banks are a low-risk investment. Why, then, should they offer shareholders average or above rates of return? They shouldn't.”

And fourthly in this morning's Distillery, The Australian Financial Review's Chanticleer columnist Tony Boyd says Telstra chief executive David Thodey is under no pressure to defend the company's 8 per cent dividend yield in the short-term, but will need to find growth businesses over the long-term. And he just might have found one – Network Application Services, which utilises Telstra's high-speed networks to offer extra, value-adding services.

"This is a $1.2 billion-a-year business that hardly existed three years ago. It is believed Thodey wants to double the revenue from this business over three years. Thodey and acting chief financial officer Mark Hall would not reveal the profit margins earned by the NAS business but they said its costs were low. Its growth prospects are strong for a number of reasons including the booming demand for data from retail consumers and the businesses that serve them.”

Staying with Telstra, The Sydney Morning Herald's Malcolm Maiden says Thodey still has to work hard to balance the need to grow revenue with the need to maintain margins, but the $1.5 billion profit result shows he's doing a pretty good job. The Australian's John Durie says there was a sense of disappointment that Telstra didn't really update the market on its capital management strategy, but that reflects the short-termism of the sharemarket and a misunderstanding of Telstra itself. Durie's colleague Annabel Hepworth wonders whether Thodey has received one of those not-uncommon phone calls from Communications Minister Stephen Conroy about his comments over the National Broadband Network's pricing structure, because his tone was ultra-conciliatory yesterday.

In other local company news, The Australian's Barry Fitzgerald says Rio Tinto chief executive Tom Albanese and finance officer Guy Elliott have foregone their bonuses to stymie any calls for their heads after an $US8.9 billion ($8.2 billion) writedown to the aluminium business, which they significantly expanded just before the global financial crisis.

Meanwhile, The Age's Michael West says corporate raider Gary Weiss is planning a rebellion against the Perpetual board, revealing he will ask the directors to be elected to drive the company's corporate restructure. The Australian's Tim Boreham checks out the stock positions of Goodman Fielder, Hot Chili and Telstra in his Criterion column. Plus, The Australian's Bryan Frith gives his take on the BHP Billiton numbers, while Giles Parkinson writes in the same newspaper that local green-tech companies outperformed the broader market two-to-one in January, but unfortunately that's because they couldn't go much further south.

The Age's Tim Colebatch questions whether there's any point building a business plan for export with the Australian dollar so high, while making the point that the argument over the inflated cost to exporting manufacturers brought about by the carbon tax looks quite ridiculous by comparison.

The Australian's Richard Gluyas got to sit in on a special evening in Melbourne to celebrate the careers of Jac Nasser and Lindsay Fox, while his colleague Jeremy Phillips revisits the problems facing the Convergence Review, for which comments close today.

In US news, Fairfax's Ian McIlwraith finds Facebook's Class B shareholders pushing the common stock value up to a notional $US102 billion in the lead up to the social network's initial public offering, hoping that it'll be a cracker. And finally, The Age's Mat Murphy explains just how much it means for New York City Mayor Michael Bloomberg to win the Super Bowl, measured in many dollars.