RBA warnings come true. Nearly two years ago senior Reserve Bank officials started warning the banks and investors that this week would come (because of higher capital needs, weakening credit growth and below trend growth in the economy). But these warnings were ignored by the banks, most analysts and investors and the banks rose to all-time highs in the first few months of 2015. The banks went on shuffling and tap dancing to avoid the inevitable. The banks’ last great fling was the home loan boom — especially from investors and self-managed super funds — which nearly sent the economy, the financial system and the banks off the rails before regulators cracked down and ended the party in the second half of 2015.
Now there is an accounting for shoddy lending, slipshod record-keeping and weak prudential controls in areas such as interest-only lending to investors here and offshore. To meet the cost, ordinary customers are being screwed with rises in home lending rates (to investors as well, but that is a consequence of the crackdown on the rorts by the Australian Prudential Regulation Authority and the Reserve Bank). Business customers were screwed earlier this year as well by the big banks with a fleet of higher charges and fees — all of which were not justified, according to RBA governor Glenn Stevens. — Glenn Dyer
ANZ ends the banking boom … ANZ tap danced its way through its interim profit statement this morning with a 24% slide in cash profit to $2.78 billion and a cut in interim dividend to 80 cents a share from 86 cents. The bank also revealed plans for a bigger cut in final payout to around 80 cents a share from the previous 95 cents a share. If that happens, it’ll be a nasty 11.6% cut in the payout to shareholders, but it will also end the long boom in bank shares once and for all.
On Monday, Westpac edged up its interim by 1 cent a share, which was hardly convincing, and with the underlying weakness in bad debts and other areas sent the share prices sliding. The big four banks were seen as the safest investments because of the dominant positions and the assurance shareholders had of rising dividends. No longer. — Glenn Dyer
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… and does the adjustment shuffle. Australian companies report according to what are known as Generally Accepted Accounting Principles, one of which holds that profits are profits, no matter how they are obtained, and that includes one-off profits and losses. Sometimes it makes sense to also mention the adjusted profit because of a one-off super profit or big loss, but it is not the accepted profit figure. Companies though now blithely report all sorts of profits, besides the main one. Banks love cash profits as opposed to statutory profits (the cash profits discount any market price profits or losses a bank might make on holdings of its own securities in various accounts, which is not banking).
The ANZ’s announcement this morning gave the statutory and cash profits, then an explanation, and then a few mentions of “adjusted” earnings or dividends as the bank’s spinners and executives tried to soften the impact of slashing the dividend and the 24% slump in cash profit (and 22% slide in statutory profit). It made for amusing read as the attempt to divert attention was palpable. For example, the reduced dividend of 80 cents a share was an 84% (of profit) payout ratio, but the bank pointed out that the “adjusted” ratio was 67% (after ignoring all to those pesky provisions). — Glenn Dyer
Warning to investors in ANZ’s report. Westpac’s impaired assets jumped 96% to $677 million in the latest half year, while the ANZ’s jumped 80% to $918 million. While Westpac’s rise was a shock, the ANZ had at least warned twice this year that impaired assets were rising because of dodgy loans to the resources sector. But buried in the report was a much more important warning for the future that should terrify investors who still believe in the idea the banks will provide a steady income:
“ANZ recognises the stability of the Group’s payout ratio and ability to fully frank dividends are critical considerations for shareholders. Following a period of dividend payout ratio expansion in the Australian banking sector, ANZ will gradually consolidate to its historic range of 60-65% of annual cash profit. This setting better reflects the changed banking environment in which we operate and the greater demands for capital.”
In other words, the long boom in bank payout is over so far as the ANZ is concerned and shareholders had better get used to a period of little or no growth in income — and perhaps even falls, if profits come under pressure from a slowing economy or slide in a key sector like housing. Westpac failed to be as bold as the ANZ on Monday, so will the NAB on Thursday …? — Glenn Dyer