Weekly wrap 2: no joy in declining bank assets
With little in the way of individual banking news this week, attention fell on the monthly lending statistics from the Australian Prudential Regulation Authority. The Sheet has extensively covered the statistics themselves, with the net result being yet another contraction in lending growth, and a flat result for deposit growth given very low rates. The latter is not helpful for bank balance sheets and tier one capital, but earnings growth potential is not much boosted anyway if banks have more money to lend but less demand for loans.
Assessment by stockbroking analysts depends entirely on how optimistic or pessimistic their respective expectations were ahead of the release.
No one is surprised that lending growth has continued to contract in spite of Reserve Bank rate cuts, given (a) little of the RBA cuts have been passed on to business loans, (b) banks have already been forced to raise both fixed and variable mortgage rates given ongoing tightness in funding, (c) the RBA cuts have stalled for now, and (d) whichever way you look at it, Australia is in a recession.
Serial bank bear RBS unsurprisingly seized on the "anaemic" lending growth numbers, and the indication that cash depositors are looking elsewhere for yield, to ram home its bearish sector sentiment once more.
Credit Suisse has been forced to downgrade its FY10 credit growth forecasts, now assuming "a deeper and later trough than previously forecast". Merrill Lynch also acknowledged the May data show growth "tracking lower than our forecasts".
On the other side of the fence, UBS called the data "predictable", and maintained its forecast of credit growth dropping from the current annual rate of 3.4 per cent to zero by early 2010, with genuine recovery not apparent until the 2011-12 financial year. This sounds pretty bearish, but with the peak in non-performing loans "likely soon to be within sight", UBS is Overweight banks as it contemplates returns on equity of around 17 per cent in 2012.
GSJB Were noted loan growth still remains above its forecasts, but the analysts are not about to make upgrades. GSJB Were still expects further contraction and is comfortable with its numbers to date.
Analysts universally agree that lending in the housing sector, which has served to offset more substantial falls in business lending, has been artificially boosted by government grants to first home owners.
Government grants are due to expire (barring any last minute change of heart) so analysts clearly expect the worst is yet to come. When it comes to deciding whether bank shares are worth buying or not, however, it depends not on what happens next but whether current prices might already be correctly valuing what happens next.