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January 1996

Australia: The party's over for Australian banks


Despite record profits, Australian banks face difficulties in the year ahead. Albert Smith looks at how the four major banks are positioned to handle a radical shake-up of the banking industry.




Australian banks have emerged from their most prosperous year - reporting record profit growth and strengthened balance sheets - but face considerable turmoil in 1996 and the years beyond.

The profit story of the banks has been impressive. In the reporting season which ended in November, all four major banks reported considerable gains. The combined profit of these banks was a $4.95 billion (US$3.6 billion) after taxation - a 15.2% improvement over the previous year's a $3.9 billion. Many of the smaller regional banks reported similar gains.

Perhaps the most notable feat of the bigger Australian banks in the past three years has been the repair of balance sheets that were badly mauled in the asset-price slump that followed the worldwide stock market crash of October 1987. Since the massive write-downs of the early 1990s, the banks have been so successful at strengthening their capital bases that one or two of them - notably Westpac - might contemplate returning capital to shareholders.

With such strong performances behind them, the banks might have reasonably expected more of the same. But going into the new year, increasingly fierce competition in the domestic market, where margins have already tightened, will certainly inhibit profit growth. And there are other factors at work in the banking environment and the economy that are going to make life difficult for bankers.

In the difficult post-crash years, the banks worked hard to eliminate non-performing assets and reduce bad-debt provisioning. The very success of these operations contributed to profit improvement. But by next year, this source of improvement will have just about run its course. In addition, a highly politicized debate and a public inquiry by the Prices Surveillance Authority have imposed de facto restraints on increases in bank fees.

In addition, some political storm clouds are gathering over the banking sector. If the opinion polls prove correct, the 12-year reign of the Labor Party could end soon. Should the conservative coalition of the Liberal Party and the National Party gain power - which many political commentators think is probable - a less-restrictive attitude to bank mergers and acquisitions is likely to prevail. Some Liberal Party spokesmen have also been promoting the notion that mergers between large life offices and large banks would be permitted. Under Labor, such mergers have been out of the question.

A conservative government could unleash forces of change in banking unrivalled since the deregulation of the Australian banking system in 1982 and the subsequent opening of the Australian market to a wider range of foreign-owned banks. However, there is an alternative position on the question of mergers and takeovers which says that a new coalition government might regard takeovers as constituting a reduction in competition: competition is the central article of faith in the conservatives' economic philosophy.

One coalition undertaking has been to open the door a little wider for the banks to enter the superannuation (pension) business through superannuation savings accounts. In Australia, superannuation has been the fastest growing source of savings since the Labor government introduced compulsory super-annuation for all employees in an effort to correct a decline in the household savings rates and to relieve future budgets of some of the burden of pension payments to an ageing population.

Although the larger banks undertake some superannuation business in a low-key way through their fund management divisions, they would like to retrieve the deposit business they lost during the 1980s when many individuals concentrated their savings on superannuation because of the tax benefits. The banks believe they would recapture much of this business if they could offer tax-deductible superannuation savings accounts. With the opposition shadow treasurer, Peter Costello, promising yet another inquiry into Australia's financial system, the banks will be watching next year's election with great interest.

Privatization will go ahead

Whichever political party wins, the privatization of the once wholly government-owned Commonwealth Bank of Australia will proceed. Sales of shares in the bank over the past four years have reduced the government's holding to a narrow majority of 50.4%. In its budget papers in May, the government indicated that it would sell its remaining shares in two tranches in the 1996-97 and 1997-98 financial years. More recently, however, the deputy prime minister and minister for finance, Kim Beazley, has revealed that the government is considering an option to dispose of its holding in the bank in one tranche before June 30 1996.

Based on the December 1 price of A$10.48, the government's shares are worth just over A$5 billion. The managing director of the Commonwealth Bank, David Murray, has said that the board would consider asking shareholder approval for the bank to buy A$1 billion of its own shares from the government. This would leave A$4 billion for the market to absorb - a biggish bite but not totally indigestible. It is most unlikely that a conservative government would upset disposal of the bank shares.

The biggest players dominate banking in Australia. Of the 49 (really about 45 because of some double-counting) authorized banks in the country, four banks hold 62% of the total Australian banking assets of A$466 billion. This does not take into account the substantial holdings all four have in New Zealand, or their banking assets in the UK, Ireland, Asia, the Pacific Islands and the US. The remaining 38% of Australian assets is shared among foreign, state and regional banks.

The state banks have disappeared rapidly in recent years - the Trust Bank of Tasmania is the only surviving state-government-owned bank. The "sold" sign first appeared in the early 1990s when the Commonwealth Bank acquired the State Savings Bank of Victoria. This was followed in December 1994, by the New South Wales government's sale of the State Bank of New South Wales to the Colonial Mutual Life Association. Then in June 1995 the South Australian government sold the Bank of South Australia to the Sydney-based Advance Bank, and in September the Western Australian government sold the Bank of Western Australia to the Bank of Scotland. These sales have done nothing to diminish the market power of the Big Four.
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