The January Australian Edge In Focus takes a look at the Big Four banks Down Under and their wholesale funding exposure, particularly as it relates to Europe. Because of extraordinarily strong domestic deposit growth and generally stronger balance sheets the Big Four aren’t as vulnerable to tightening credit conditions as they were in the fall of 2008, when Lehman Brothers’ bankruptcy caused the most severe global credit contraction since the Great Depression of the 1930s.
This Great Financial Crisis of 2008-09 is still not likely to be repeated in 2012, not because any particular initiative on the Continent will ease debt burdens, but for the simple reason that everyone has or should have enough information to prepare for a worst-case.
But financials have come under significant selling pressure as the crisis across the pond has intensified. The S&P Global 1200 Financial Index is off 15.6 percent for the 12 months ending Jan. 20, 2012, in US dollar terms, compared to a 2.5 percent decline for the MSCI World Index.
Meanwhile Australia’s Big Four have generated an average total return (capital gain or loss plus dividends) in US dollar terms of 6.7 percent over the same time frame. Average one-year dividend growth for the group is 11.7 percent. Canada’s Big Six–like Australia’s “Big” group recognized among the safest, best banks in the world–have generated a negative average total return of 1.8 percent. Major Canadian banks have grown dividends an average of 5.6 percent over the past year.
Our favorite bank Down Under, Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY) is currently yielding 6.7 percent for US investors (who don’t enjoy the direct benefits of Australia’s “franking” system of marking up dividends to account for taxes paid by the sponsor). The stock has lagged its domestic peers over the past year but has posted a 24.3 percent total return since its debut along with the rest of the Australian Edge Portfolio on Sept. 26, 2011.
ANZ sponsors (level I) an American Depositary Receipt (ADR) that’s traded on the US over-the-counter (OTC) market. The ADR represents one ordinary share traded on the Australian Securities Exchange (ASX).
ANZ’s performance since late September is second to National Australia Bank Ltd (ASX: NAB, OTC: NAUBF, ADR: NABZY), which is up 25.9 percent, among Australia’s banks. NAB is yielding 7.2 percent at current levels; among the Big Four, however, it has the greatest wholesale funding exposure to the UK and Europe. NAB’s sponsored (level I) ADR represents one ordinary share traded on the Australian Securities Exchange (ASX).
Westpac Banking Corp (ASX: WBC, NYSE: WBK), which trades on the New York Stock Exchange as an ADR, is yielding 7.4 percent in the US after boosting its distribution rate 12 percent last year. One of Westpac’s sponsored (level II) ADR’s is worth five ordinary, ASX-listed shares.
Commonwealth Bank of Australia Ltd (ASX: CBA, OTC: CBAUF, ADR: CMWAY) is yielding 6.4 percent as of this writing. CBA also boosted its payout rate from fiscal 2010 to fiscal 2011, by 10.3 percent in its case.
In a Jan. 20, 2012, “Ratings Update” Canada-based DBRS noted that ANZ’s “credit quality remains supported by its solid financial risk profile and its strong banking franchises in Australia and New Zealand.”
The following “strengths” were identified by DBRS in its report:
- ANZ has a solid retail banking franchise in Australia, as well as the leading market share in New Zealand.
- ANZ strengthened its financial risk profile in response to the global financial crisis and has maintained metrics in this area at strong levels, with improvements to liquidity, funding and capital. Furthermore, post-crisis revenue streams have been further diversified, with non-interest income representing a growing proportion of revenue.
- ANZ has adopted a well-established strategy to create a leading super-regional bank that, while still focused on the mature Australia and New Zealand markets, is aiming to generate 25 to 30 percent of its earnings from the faster-growing Asia-Pacific region by 2017.
- ANZ’s–and its peers’–credit profile is enhanced by conservative, supportive regulators, including the Reserve Bank of Australia and the Australian Prudential Regulatory Authority.
Among the primary challenges confronting ANZ, according to DBRS, is its reliance on wholesale funding. This challenge is the crux of the January In Focus. DBRS also notes that 87 percent of ANZ’s revenue comes from Australia and New Zealand, two economies that could actually be considered one because of their close correlation. Net interest margins are also shrinking, a challenge facing ANZ as well as its peers. ANZ also has more exposure to New Zealand that the other Big Four banks.
DBRS has a “modestly positive” outlook for ANZ’s earnings in 2012, based on the continuing strength of Australia’s economy and demand for its resources. Funding costs are likely to increase as short-term crisis financing arranged and backed by the Australian government is replaced by more stable and longer-term but more expensive debt. Fluctuations in global markets will roil the bank’s asset portfolio, though loan-loss provisions should continue to decline and thus help earnings.
Critically, ANZ’s asset quality remains strong relative to global peers. The loan portfolio provides “a substantial level of safety” against significant market-driven losses, as 53 percent is comprised of what DBRS describes as “low-risk” housing loans.
The source of ANZ’s stability remains its solid deposit growth at home and abroad. Customer deposits have grown from AUD132.7 billion in September 2008 to AUD183.2 billion in September 2011, an increase of approximately 38 percent. Growth from September 2010 to September 2011 was 11 percent. Domestic growth will likely slow due to competitive pressures, but ANZ has also grown deposits in its Asia-Pacific, Europe & America (APEA) unit, with 40 percent growth from September 2010 to September 2011. Overall customer funding has steadily increased from 50 percent to 61 percent of total required September 2008 to September 2011.
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