Banking’s perfect storm. The European Central Bank came, it talked, it decided and it confused everyone by cutting its deposit rate to -0.40%, expanding its bond buying by 20 billion euros a month (up a third) and by introducing a new scheme of charging negative rates on loans made to banks to get them to lift their lending. Then ECB boss Mario Draghi proceeded to totally undermine the message by suggesting that rate cuts had run their course because of the unknown impact of negative interest rates on banks and other financial groups. Shares and the euro fell at first, then rose, and then ended confused. In Australia, we don’t have to worry about negative rates or paying banks to lend — we still pay them a lot of money to finance our increasingly expensive housing dreams. The big four banks have rescued the local sharemarket time and time again in the past two years, with strong profits, big price rises and big dividend payouts, and a seeming invulnerability to bad news. And even though the past year has yielded a big sell-off, sentiment seems to be changing back to positive at the moment, as we have seen on a couple of days in the past fortnight as bank share price gains helped the ASX resist and rise in the face of solid selling pressure. But investors are ignoring what can only be described as a gathering “perfect storm” (sorry for the cliche) of bad debts, weak revenue and increasing profit pressures. — Glenn Dyer

Australian headwinds. Building approvals and housing finance approvals have been weakening for three months now, and while a steadying of the pace of lending and construction will mean a higher level of activity that will last longer than if we had another spike in lending and prices, it also means the most profitable part of the big four banks faces a slowdown this year. And with investor lending slumping, that slowdown could be sharper than expected. Still, bad debts will remain low in housing because interest rates are low and will remain low for sometime. But regulators are concerned that commercial property lending is getting a bit too warm in markets like Melbourne and Brisbane. On top of this the big four banks are facing a spike in corporate bad debts from the likes of Clive Palmer’s Queensland Nickel empire, the failed Dick Smith, small transport company McAleese, and iron ore and steel group Arrium where 16 local and international lenders will have to agree to take losses to save the company in a refinancing deal now being negotiated. And then there’s Slater & Gordon and the huge debt piling overhanging its banks in a restructure. Watch for a rise in impaired loans in the March 31 half year reports for Westpac, NAB and the ANZ — if there are none, then it will smell. — Glenn Dyer

Kiwi cows bite. But the big danger comes from across the Tasman, and Moody’s ratings group agrees. Yesterday’s rate cut by the Reserve Bank of NZ to a record low of 2.25% (with at least one more to come) was driven by the sinking prospects for the most important sector in the Kiwi economy: dairying. On Tuesday Fonterra, the giant exporter, cut its milk price to a nine-year low of NZ$3.90 a kilo — less than half the NZ$8.50 a kilo back in 2013-14. Global dairy prices have fallen by more than 60% from 2014 to March 1 this year. Australian banks have $30 billion exposure to the Kiwi dairying sector through their local arms (with control of 80% of the NZ financial system). Yesterday afternoon Moody’s said in a report: “A deterioration in the asset quality of dairy loans would have a material effect on the banks.” In fact, agriculture made up about 14% of New Zealand banks’ total loan portfolios in January this year (according to the RBNZ), and is the largest sector concentration in bank loan portfolios behind housing. Moody’s said yesterday:

“Westpac is the second largest by assets, behind ANZ. Around 11% of ANZ New Zealand’s portfolio is made of up agricultural loans, while Westpac NZ’s exposure is around 8% of its loan book. NAB’s Bank of New Zealand has around a 15% agricultural exposure, while Commonwealth Bank’s ASB Bank counts 11% of its loan book as agricultural. An average of around 70% of these loans are dairy loans.”

These are exposures which can be damaging to the bank’s wealth. — Glenn Dyer