Finance

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Australians traditionally have been happy paying handsomely for shares in their banks on the view that the uncompetitive nature of the local industry would always deliver outsized returns.

There was a moment, when the Australian dollar was at its peak in 2011, when all four of the country's big banks -- Commonwealth Bank, Westpac, ANZ and NAB -- had market capitalizations higher than Bank of America.

American Horror Story
Bank of America's market capitalization dipped below all of Australia's big four banks on Dec. 19, 2011
Source: Bloomberg data
Note: All figures have been converted to U.S. dollars.

While those days have passed, the banks are still some of the world's most highly valued, based on price-to-book multiples.

Go Forth and Multiple
Australia has the second-highest price-to-book ratio of banking industries in rich countries.
Source: Bloomberg data
Note: Only banks with market capitalizations above $10 billion in OECD countries have been included. Countries with just one applicable bank have been excluded to limit skew.

That image took something of a battering Monday when Westpac, the second-biggest player, announced that bad-debt charges had risen to their highest level since 2010 during the six months through March. Its shares dropped 3.5 percent and dragged the rest of the industry down: Market leader Commonwealth Bank slipped 2.1 percent, ANZ fell 2.2 percent, and NAB declined 2.1 percent.

Whether this will see bank shares return to levels more typical in other parts of the world is open to question. Australian banks still have some formidable advantages.

The strength of an economy that's still growing after 24 years without a recession means that bad debts, which run as high as 17 percent in Italy, are among the world's lowest:

Performance Anxiety
Nonperforming loans as a percentage of total loans, by country
Source: World Bank, http://bit.ly/1WBtdyT
Note: Data are for 2015, except for U.K., France, Germany, Switzerland, Korea, and Italy, which are for 2014.

Provisions in Westpac's Australian business of A$2.9 billion ($2.2 billion) during the half-year were up 13 percent from six months earlier, but still represented just 0.5 percent of its lending there. An untroubling 1.03 percent of credit exposures were rated as impaired, nonperforming or substandard, the company said.

As a result, Australian banks' returns on equity outperform their overseas rivals. In the U.K., Lloyds Banking Group shares rose the most in four-and-a-half years in February after the company said it had achieved an underlying ROE of 15 percent -- even though the actual ratio was a bare 1.5 percent, thanks to payments for wrongly sold insurance products. In Australia, Westpac's ROE of 14.2 percent in the most recent half was seen as disappointing enough to merit a 150-word explanation of how management planned to fix it.

King of the Return
Australia's banks have the best return on equity among developed markets
Source: Bloomberg data

Those returns aren't just there to make executives feel good, either. While U.S. banks pay out about 31 percent of their net income as dividends, and even the Canadians only have a 49 percent payout ratio, the Australian industry pays out a median 71 percent.

The horizon isn't without clouds. Westpac and ANZ are facing legal action from the securities regulator for alleged manipulation of the country's interest rate benchmark, and the opposition Labor party has pledged to launch an inquiry into the industry should it win an election that could come as soon as July. As banks elsewhere have learned over the past decade, adverse scrutiny and regulation can be headwinds quite as strong as the broader economic environment.

Still Rising
Australia's GDP growth has come off its commodity-boom highs, but is hardly expected to crash to earth
Source: Bloomberg data

Still, for the moment those liabilities are contingent, and the benefits of a healthy economy are enduring. While weakening inflation has raised the risk of an interest-rate reduction that would erode banks' lending margins, the current central bank rate of 2 percent is a world away from the negative numbers elsewhere. 

Australian bank shares may still be costly. That doesn't mean they're overpriced.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net