Banks still on RBA profit-watch negative. No mention of bank “culture” in the latest Financial Stability Review from the Reserve Bank, but there was a very barbed warning to them not to chase new, riskier sources of profits to maintain what are already very high returns on equity (ROEs) — one of the key measures of bank profits in Australia. These ROEs as they are known are also expressions of the overly fat profits the banks are making in Australia and NZ where they dominate completely, with 80% of each market. Westpac has an ROE target of 15%. Its latest figure was 15.8%. ANZ last year abandoned its target when it was clear that it would not be met because of rising capital demands by regulators. Its latest figure was 14%. The CBA (17.2% and the highest in the sector) and NAB (12%) don’t have targets. Compare these to the cash rate of 2% and the 10-year bond rate around 2.55% and you get an idea of how fat the big four profits are. The RBA reckons they are fat enough. Clearly the RBA felt the need to issue such a direct warning to banks, their boards and management. It’s not a question of a lack of trust, more a question that the banks have a poor recent track record with regulators on home lending, financial products, client relations and other cultural issues. In other words, the banks, collectively, are on a sort of ratings-watch negative from the RBA until the banks prove otherwise. — Glenn Dyer

Big flop, little oil. Peabody Energy’s US$6.3 billion bankruptcy grabbed the headlines last week, but two US oil and gas groups fell over as well, and last night the big American solar group SunEdison was expected to file for Chapter 11 bankruptcy. The oil and gas groups failing were Energy XX1, which had more than US$2.8 billion in debts. Goodrich Petroleum filed on Friday with US$400 million in debt. These failures mean at least 61 US and Canadian companies have collapsed and gone into bankruptcy proceedings since the start of 2015, according to US law firm Haynes and Boone, which keeps a monitor. A total of 19 have failed so far in 2016, including the two last week. Total debts so far are more than US$22 billion. SunEdison’s impending collapse though will be a biggie. Nine months ago it had a market value of more than US$10 billion; on Friday, that had fallen to US$117 million and debts were more than US$12 billion. Debts don’t discriminate between oil and new energy sources. Globally, Standard & Poor’s said five companies defaulted on their debts around the world last week, taking the number so far this year to 46, with around US$50 billion involved — a seven year high. Australia’s Arrium is in that list. Cliffs Natural Resources, a US company with Australian iron ore mines, is another. — Glenn Dyer

Peter Fray

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