Aussie Bank Earnings Slow as Regulation, Competition Hurt

  • Rise in bad-debt charges overshadow gains from lending growth
  • Westpac profit growth weakest in 6 years, ANZ's slowest in 7

Profit growth at Australia’s largest banks is slowing after a multi-year run of record earnings, as a sluggish economy prompted the lenders to set aside more money for bad debts.

Westpac Banking Corp., the country’s second-largest lender by market value, Monday posted a 3 percent increase in cash profit to A$7.82 billion ($5.6 billion) in the year ended Sept. 30, the weakest increase since 2009. It follows lower-than-expected earnings at two of its main competitors last week.

Australia’s largest four banks are staring at slowing earnings growth as competition intensifies and regulation is tightened. The lenders have raised almost A$20 billion this year to meet regulatory requirements partly intended to bolster them to face any downturn in the housing market. They have also increased mortgage rates, blaming the cost of holding more capital.

“The strong run in Australian bank profits has ended and we’ll probably see a slower pace of growth for some time to come,” Shane Oliver, a Sydney-based global strategist at AMP Capital Investors Ltd., said by phone. “The tailwind from falling bad-debt charges is behind us, as is the easy growth from mortgage lending.”

AMP Capital, which manages A$113 billion, is advising investors to hold fewer bank shares than are represented in the benchmark indexes, Michael Price, the head of fundamental equities at the investment firm, said in an interview last month.

Bad-Debt Charges

National Australia Bank Ltd. missed profit expectations and Australia & New Zealand Banking Group Ltd. reported its slowest profit growth in seven years. Commonwealth Bank of Australia, which has a June fiscal year, reveals quarterly earnings on Nov. 5. The lender in August reported its weakest annual profit growth since 2012.

For Westpac, it was the slowest profit increase since an 8 percent drop in pro-forma cash earnings in the fiscal year ended 2009 as bad-debt charges are now eating into profitability after years of declining. The Sydney-based lender posted a 16 percent increase in the measure to A$753 million, the first rise since 2012, according to earnings statements.

Bad-debt charges at the four banks rose 9.5 percent to a combined A$3.2 billion for fiscal 2015, based on a compilation of their annual filings. The measure is climbing, prompting lenders to set aside more funds as they brace for an increase in sour loans on expectations that asset quality will decline after years of improvement.

Westpac said it saw an increase in consumer-loan write-offs, while National Australia said it was raising the provisions for certain sectors such as dairy in New Zealand.

Squeezed Margins

Higher capital and increased competition is also hurting their net interest margins, a measure of lending profitability. National Australia’s net interest margin fell to a record low for the year ended Sept. 30. Westpac managed to hold it at 2.08 percent, while the measure fell 9 basis points to 2.04 percent for ANZ.

The cost of holding more capital also led the four lenders to raise mortgage rates by 15 basis points to 20 basis points to protect margins.

Shares in the lenders have lost ground this year, with the bank index down 9.6 percent, on course for its first annual drop since 2011. The benchmark S&P/ASX 200 Index has fallen 3.8 percent this year.

Before it's here, it's on the Bloomberg Terminal.