The Distillery: Bank bonanza

Another day, another record bank profit. Yes, it felt like Groundhog Day as Westpac Banking Corp joined rivals ANZ Bank and National Australia Bank in announcing strong earnings over the past week. In all, if you include the Commonwealth Bank’s most recent result, the big four delivered $27.4 billion in cash earnings across the past year, but who’s keeping count?

Somehow the phrase “solid bank profit reporting season” seems to undersell the results, but nonetheless that’s how one commentator views it, adding that Westpac outshone NAB and ANZ on this occasion. Another scribe takes a holistic view of the sector and suggests the banks are delivering the ultimate win-win-win scenario.

That particular commentator, the Herald Sun’s Terry McCrann, explains the virtuous cycle that should have everyone smiling.

“The banks clearly built a - mostly - win-win outcome for their customers on both sides of their operations. Both depositors and home loan borrowers voted with their feet, either directing them physically… into big bank branches, or via the virtual reality of online banking. And out of that win-win reality for their customers, the big banks delivered strong profit outcomes and increased dividends for their shareholders. In many cases, it would have been a triple win - for a shareholder/borrower/depositor.”

What goes around comes around and many Australians are likely recouping some of their bank fees via strong dividends and share price performance. The quintessential ‘if you can’t beat them, join them’ scenario.

The question asked by The Australian Financial Review’s Andrew Cornell, however, is how long can the banks continue to drive such strong share price performance?

“The only challenge for bank investors now seems to be when to take some money off the table after such a stellar run – quite a few decided to take some Westpac money on Monday as its shares traded lower than peers. Whether bank shares are too hot is one question, but the performance is there operationally.”

Moving specifically to Westpac, the AFR’s Chanticleer columnist, Tony Boyd, praises the results and notes the “veiled warning” chief executive Gail Kelly has delivered her peers.

“Delivering the strongest result of the three big banks with September balance dates, Kelly said Westpac would not be content in 2014 to grow its home and business lending at below the system growth rate. She has ambitious targets for home lending and business lending, including the strongest year of business credit growth since the global financial crisis.”

Yes, the faux competition war is back on and the banks are incredibly good at it.

So good in fact that Business Spectator’s Stephen Bartholomeusz points out that the ‘fight’ for market share isn’t reducing credit quality.

“The results of the major banks don’t provide any evidence that renewed competition in business lending is leading to poorer credit quality, given that their impairment charges and 90-day past due lending are at levels below historical averages and the levels of new lending are so low.”

It may, however, indicate an environment of such low risk-taking that economic growth stagnates.

Meanwhile, Fairfax’s Malcolm Maiden looks into new global capital requirements and finds the banks successfully negotiating the dampening effect. Indeed, despite offering high dividends, the big four are on track to run minimum tier one ratios of 8.5 per cent by 2018 while continuing to deliver record profits.

“(Westpac) still earned enough to boost its tier one capital base by 94 basis points or almost 1 percentage point to 9.1 per cent. The other big banks have lower tier one ratios. ANZ's tier one ratio is 8.5 per cent, CBA's 8.2 per cent and NAB's is 8.43 per cent. They do however still have time to build them and given the profits they are all earning, they shouldn't need to take an axe to dividend payouts to do so.”

While the big four have taken pride of place at the head of business columns over the past week, the central bank will today grab the limelight with its monthly rates call. According to the Herald Sun’s Terry McCrann, the surest bet on Melbourne Cup day is that the RBA will keep the cash rate steady.

For some reason the term ‘sure thing’ on a big race day doesn’t inspire quite as much confidence as it should. Nevertheless, economists widely agree that rates will be kept on hold with the disagreements coming around whether the next move will be up or down.

The United States Federal Reserve will play a vital role in deciding who is right.

In company news, Coca-Cola Amatil disappointed investors yesterday, but not The Australian’s Criterion columnist Tim Boreham who spots a buying opportunity despite the continued struggles with consumer confidence. Fairfax’s Adele Ferguson isn’t so sure, expecting times to only get tougher from here. The big question that needs to be addressed is: who will succeed long serving chief executive Terry Davis?

Meanwhile, life at Whitehaven Coal has become a lot more predictable since Nathan Tinkler exited the arena, the AFR’s Matthew Stevens suggests. Now the company just needs a revival in the coal market, though that might be asking a lot.

Finally, Fairfax’s Elizabeth Knight argues the success of the Nine float is all a matter of price with potential available if it prices at the bottom end of its range, while the AFR’s Alan Mitchell makes the case for the government to cease efforts to prevent the car sector’s demise. Instead, it should channel efforts toward adjustment, he says.

If you put your economist hat on it’s very hard to argue with that contention. After all, once you are in the business of picking winners, it’s a dangerous cycle to escape.