Terry McCrann: How the big banks are making their billions
Our four big banks are so similar. They have the same business profiles. They charge (and pay) the same interest rates. And they make the same mistakes, writes Terry McCrann.
Terry McCrann
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The ANZ has produced a truly extraordinary – if not mind-boggling, at least mind-extending – profit result.
On the surface it has actually managed to increase its profit, and increase it dramatically, in the June quarter – the quarter where the economy was ordered into its worst recession in nearly 100 years – compared with the average quarterly profit ANZ had recorded in the ‘pre-virus’ six months to the end of March.
The June quarter profit was $1.6bn. The profit in the March half year had been $2.45bn or $1.23bn per quarter. So the June quarter result was up a scintillating, startling, 30 per cent on that average.
No wonder directors opted to pay a delayed, albeit much-reduced, 25c interim dividend. That was about the most they were ‘allowed’ to pay by their regulatory overseer APRA, in this time of recession and plague.
Now, these are the cash profit numbers that take-out the distorting impact of special plus or minus items like asset sales or one-off (?) provisions for customer remediation payments from the Royal Commission.
They aim therefore to tell the most accurate story of what’s happening in real-time at the bank-customer interface.
So how were the ANZ numbers even remotely possible, in the context of a recession destroying businesses and jobs? Surely, bad debts would have started to rocket? Surely, borrowers would have found it hard to service their loans?
Well, there are three reasons for the good ANZ June quarter numbers – and also incidentally, the similarly (albeit, not quite so) good Westpac numbers.
The numbers that Westpac did disclose seemed to produce an even more dramatic profit leap. It reported a (cash) profit of $1.32bn- nearly three times the $497m quarterly average over the March six months.
The earlier numbers, though, included some big one-off negatives (think Royal Commission and other Westpac naughties). Westpac did note that the ‘real’ jump in the June quarter was 19 per cent on the quarterly average of the previous six months.
So, how did they both do it? The answer starts with a big clue in the detail of both their numbers.
ANZ disclosed that its provision for bad debts actually fell in the June quarter; to just $500m compared with $1.67bn (quarterly average $837m) in the March half.
Same with Westpac: June quarter bad debt provision was $826m compared with $2.2bn (quarterly average of $1.1bn) in the March half.
In both cases the banks obviously made their bad debt provisions some time after March 31, by the time we were into the lockdown recession. They clearly – choose your term – over-provided or prudently provided, not knowing what we and they faced.
Now that we’ve actually moved through the June quarter, they can see somewhat less provisioning is needed; the recession and the economic destruction hasn’t been quite as bad as we all feared. So far.
You therefore can get a better sense of the real profit performance (and impact on customers) quarter-to-quarter, by adding back the provisioning.
So for the ANZ, the June quarter profit pre-provisioning was $2.1bn, up ‘just’ 2 per cent on the March half pre-provisioning average quarterly number.
For Westpac, the June quarter pre-provisioning number was $2.14bn, actually down ‘just’ 4 per cent on the March half pre-provisioning quarterly average.
Two points on that.
First, ANZ did do better than Westpac. Both though significantly lag Commonwealth. We’ll have to see with NAB.
Secondly, it’s interesting how similar the underlying Westpac and ANZ numbers were.
That’s because our four big banks are so similar. They have the same business profiles. They charge (and pay) the same interest rates. And they make the same mistakes.
I used the word ‘just’ in both cases, because even these adjusted numbers while nothing like the remarkably, scintillating, apparent surface surges are still impressive for a quarter where the economy was in deep recession.
That brings us to the two other drivers.
The banks did not spell it out, but all those deferrals of interest payments for businesses and stressed home loan home borrowers are nevertheless still included as income accrued and ‘received’ in the June quarter.
The banks assume the actual money will eventually flow when the deferrals end, as currently scheduled later this year.
That money will actually flow into them in the coming March half, but will have already been counted in the June quarter (and September half).
The other big driver is the interest margin.
In March the Reserve Bank did two big things. It cut its official rate to 0.25 per cent, effectively zero.
It also guaranteed to supply the banks with money, if needed, at that 0.25 per cent.
The banks have not borrowed much under this facility, but that’s because they can borrow at least as cheaply in the market.
Banks have slashed both deposit rates and lending rates, but they were able to maintain their margin pretty much close to what it had been in the pre-slashing March half.
Westpac told us it had fallen only from 2.03 per cent in the March half to 1.92 per cent in the June quarter.
ANZ which has a smaller share of higher-margin home loans had its interest margin down from 1.69 per cent to 1.59 per cent.
In short, despite and indeed because of such low rates, the banks have been able to sustain their profit margins.
It thus all comes down to bad debts, just as was the case in 1991.
We’ll see this played out in the NAB numbers. And then it’s on to September, where we will get the big picture.
Originally published as Terry McCrann: How the big banks are making their billions