Now that the Commonwealth Bank has lifted profit 7%, St George says its on track for a full year result of around 8% to 9% profit growth, its would-be merger partner, Westpac, sees its profit heading in the same direction and the merged Bendigo And Adelaide Bank had a solid 2008 profit, perhaps Australian investors will swallow their losses and admit that they have been wrong about our banks for most of this year.

There has been some rubbish written and spoken about Australian banks in the past seven and a bit months as they have grappled with the credit crunch and dodgy loans. Yes, the banks have made bad calls in some areas, but some have shown sharp footwork, while others have owned up to the problems quick smart and been pretty honest about the problems.

If you look at some of the talk and the very sharp falls in price, you’d be excused for thinking that we were in the US or UK, where the banks have taken a real pasting from the subprime mess and the credit crunch it cased. It seems hard for many investors and the odd analyst to believe that our banks are very profitable, so much so that they stand out when compared to the peers in the US and Europe. Given the volatility since January, and the continuing eruptions in the US and UK,  its still hard for local investors to accept the soundness of our banks.
 
So a speech from Phil Lowe might help. He’s the Reserve Bank’s Assistant Governor who oversees the financial system of this country. In a speech to a Sydney finance conference today he made very clear the country’s central bank (and its so-regulator, APRA) see our banks as high-rated havens, strongly capitalised and solidly profitable.

The Australian banking system remains highly profitable by international standards. Over the most recent six-month reporting period, profits after tax (and outside equity interests) for the five largest banks were up 12½ per cent on the level of a year earlier and were double those of five years ago. 
 
Looking forward, some decline in aggregate profits is expected by banking analysts, with a couple of the large banks recently announcing higher provisioning expenses for the second half of the current financial year. Despite this, their forecasts suggest that the annualised after‑tax return on equity for the largest banks over the second half of the year will still be around 15 per cent, not that far below the average of the past decade. 

And why?

These strong profit outcomes are reflected in the high credit ratings of the Australian banks, with the four largest banks all having AA ratings. Consistent with these high ratings, the system is soundly capitalised, with the aggregate regulatory capital ratio around 10.5 per cent, similar to its average level over the past decade.

It is notable that amongst the largest 100 banks in the world, there are less than a handful with higher ratings than those of the large Australian banks. And, unlike the situation in some other countries, the larger Australian banks have not been forced to raise significant amounts of new capital to cover writedowns.

And today we got confirmation of that view from the Commonwealth Bank: despite a sharp rise in provisions for dodgy loans to the likes of Centro, Allco and some other financial and property engineers, the bank managed to provide a nice improvement in earnings for the year to June.

The result though does undermine the bank’s strong argument that it can’t guarantee a drop in rates if the RBS cuts rates next month. On these figures it and its competitors can certainly bring rates down: after all the 90 Day bank bill rate has fallen to where a cut of 0.25% by all banks is easily achievable.

Despite share price falls approaching 30% and 40% at times, our banks are not struggling, trending lower and incurring losses. That’s a fallacy.

Peter Fray

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