RBA warns investors: expect lower bank profit growth

Bank investors may need to further cut their expectations about the profits major banks will produce in the coming years, the Reserve Bank of Australia warned on Friday.

In its twice-yearly Financial Stability Review, the RBA says Australian banks and other authorised deposit-taking institutions are likely to make lower profits because of expected "subdued" credit growth. The RBA believes the economy will not soon see another consumer credit boom like that which drove bank profit growth in the 15 years to 2008.

"Shareholders may need to revise their expectations about the future growth in ADI profits," the RBA says in the Review.

The Review repeats the RBA's well-publicised assessment that Australian banks are generally well prepared for a downturn and have almost no direct exposure to troubled European peripheral economies. But it also notes that non-performing loans remain high (see following article).

August data from the Australian Prudential Regulation Authority showed banks earned a return on equity of 18.1 per cent in the March 2011 quarter, and 16.1 per cent in the year to March. But, the RBA noted in the Review, those numbers improved mainly because the banks were able to cut their charges for bad and doubtful debts. Revenue growth was steady at around four per cent, well below pre-crisis levels.

There are signs that banks and investors have reduced their return expectations slightly, but the RBA's continued statements show it wants expectations to fall further. It is concerned that shareholders seeking to hang on to high bank returns will pressure bank boards and managements into bad decisions.

In the Review, it signals special concern that banks may be too keen to escape lower profitability by buying into emerging markets such as China.

"It will be important that ADIs do not seek to imprudently expand their balance sheets by easing lending standards, or by taking on excessive risks in unfamiliar markets or products," the RBA warns.

This could be seen as a particular warning to the ANZ, which has been searching for opportunities to invest in Asian banks.

ANZ has two equity investments in China, through Shanghai Regional Commercial Bank and Bank of Tianjin, as well as its own small Chinese business. Commonwealth Bank also has two equity investments, through Bank of Hangzhou and Qilu Bank.