THE DISTILLERY: CBA defensive

Jotters shine a global light on CBA's results, while another says it won't be BHP and Rio threatened by any Chinese slowdown.

Between the numbers and the briefings, Commonwealth Bank’s quarterly results showed that Australia’s banks have to find a way to manage a domestic slowdown, while planning for a European catastrophe. In this morning’s edition of The Distillery, Australia’s business commentators strive to put CBA’s numbers into their proper domestic and international contexts. Elsewhere, The Age’s Malcolm Maiden makes a great point about the slowdown warnings coming from the top of the mining sector – the consequences will be felt most at the bottom.

The Sydney Morning Herald’s Elizabeth Knight finds CBA less concerned about a Greek euro exit – recently dubbed a "Grexit” – than the collapse of Lehman Brothers.

"Declaring himself less of an expert than others on the ramifications of Europe abandoning Greece, Narev suggested it would not have the same impact as the global financial crisis. He said the difference this time was that financial institutions were prepared for the event. When Lehman Brothers collapsed, it took world markets by surprise. ‘An organisation like ours, and there would be many others around the world, plan for that scenario and know what would happen,’ he said. But global instability played well into Narev's portrayal yesterday of CBA as the local bank prepared to play it safe. It will fight the others on technology and customer service and says it will sacrifice some margin in return for solid funding.”

While the banks are better prepared, a ‘Grexit’ would reap enormous damage on bank balance sheets around the world, as explained by The Australian’s Richard Gluyas.

"To the best of their ability, prudent lenders around the world have been tidying up their counterparty exposures, reinforcing their balance sheets, extending funding maturities and generally preparing for the worst. That doesn't mean the four major banks are insulated; far from it. It just means they're primed. A Greek euro exit is looking ever more likely, with political parties that negotiated the €173 billion ($221 billion) loans-for-austerity program turfed out in May 6 elections. Cross-party talks to form a new government collapsed on Tuesday, with pro-bailout parties again considered likely to lose a new election next month.”

Business Spectator’s Stephen Bartholomeusz writes that CBA’s results simply confirm that there’s a domestic slowdown underway, in some way inspired by Europe’s problems. CBA and the other big four banks have to deal with both.

"All the majors, faced with weak demand for credit, funding cost pressures, increasing regulatory costs and the elevated risks emanating from Europe, have retreated to a level of conservatism last seen in the early 1990s. CBA, like its peers, is restricting lending growth to its ability to fund new loans with deposits while maintaining historically high levels of tier one capital and stocking up on liquidity as insurance against the risks of another financial system meltdown, a risk that has risen dramatically now that Greece is on the verge of a financial implosion… In the circumstances, it isn’t surprising that the Australian banks and their customers have adopted highly defensive postures that are likely to be maintained for the foreseeable future.”

And, The Age’s Malcolm Maiden urges his readers to look beyond BHP Billiton and Rio Tinto when it comes to China’s slower expected growth rates. It’s the smaller, higher-cost miners that are vulnerable.

"Many juniors are now sitting in projects that need to be delayed at least and, if prices stay low, may not go ahead at all. They are potentially in the same position as the dot.com hopefuls in 2000: with money raised, but no way to redeploy it profitably. Dot.coms slowly died as their cash burned away, and some smaller miners will go the same way. Investors looking to weed their portfolios should first consider what commodities they are exposed to. All of the industrial commodities are vulnerable if global growth and commodity demand slips, of course: concerns about Europe and China have dragged prices lower for that reason. But aluminium and nickel are particularly challenged, by production overhangs that will exist for years.”

The Age’s Tim Colebatch has a somewhat misleading headline this morning that reads, "BHP wants to be free of unions”. That’s not quite what he argues. BHP argues that unions should stick to wages and conditions, but the Fair Work Act enables them to infringe on decisions that should be left strictly to management. The Australian’s Barry Fitzgerald says the speeches from BHP Billiton chairman Jacques Nasser and chief executive Marius Kloppers casting doubt on the iron ore price outlook quietly undercut the miner’s arch-rival Rio Tinto. After all, iron ore is of greater importance to Rio than it is to BHP.

The big company story out of yesterday was Insurance Australia Group’s "strategic review” of its UK business. The Australian’s John Durie says IAG boss Mike Wilkins is selling the unit into a buyer’s market. The Australian Financial Review’s Chanticleer columnist Tony Boyd says "strategic reviews” have become precursors to the sacking of a couple of chief executives, adding that hopefully IAG is more mature about it.

In other company news, The Australian Financial Review’s Matthew Stevens has gotten wind of rumours that Etihad Airways executives have found their way to Canberra to discuss its intentions with the Foreign Investment Review Board. The Australian’s Bryan Frith remains unconvinced by the rival bid for Hastings Diversified Utilities Fund.

Turning back to international economic matters, The Australian’s economics correspondent Adam Creighton says Europe’s inability to stick to austerity is comparable to the Monty Python Mr Creosote sketch. He’s the over-eater in the French restaurant, persuaded into eating one last wafer-thin mint, only to explode afterwards. The Age’s Asian affairs reporter Peter Cai writes that Australia’s ambassador to Indonesia, Greg Moriarty, holds serious concerns for the rising tide of Indonesia economic nationalism. And, writing in The Australian, Giles Parkinson says Australia is poised to play a crucial role in the development of a global "climate bonds” market.

Meanwhile, closer to home, The Sydney Morning Herald’s Michael Pascoe says the push towards tax reform has stalled between a government that has no political capital left and an opposition that can promise anything while it remains in opposition. The Australian’s economics editor David Uren finds the governments of Western Australia and Tasmania trying to offer some relief for higher electricity charges, while The Australian Financial Review’s economics editor Alan Mitchell looks at the two-speed economy through the prism of GST distributions.

And finally, The Sydney Morning Herald’s Jessica Irvine has had enough of the whinging from the people’s streets to the CEO suites about the challenges of living in an economy that’s had 20 consecutive years of growth. Agreed. We’ve got it made here Australia. Drink a glass of cement and harden up.

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