Banks turning risk averse as economy slows

Are the banks bunkering down and subtly flagging more difficult times ahead?

The days of banks chasing aggressive growth are officially dead.

The days of banks chasing aggressive growth are officially dead, raising questions on whether they are bunkering down and subtly flagging more difficult times ahead.

Since March, ANZ, National Australia Bank and Macquarie Group have shed a combined 3415 jobs while shrinking their balance sheets.

Job losses rise to more than 3500 once Commonwealth Bank’s second half to June 30 is included.

The cost cutting coincided with ANZ and NAB running off $27bn of institutional loans not generating strong enough profits in the past year, as all banks reduce their exposure to large corporates and government entities rather than expand.

Both also gave up market share in mortgages in the past six months, shunning riskier loans and sharpening their focus on profits amid hot pricing competition.

Westpac is likely to report similar trends in annual numbers on Monday.

As one veteran banking analyst put it: “You don’t listen to what they say, you watch what they do”, given that banks are leveraged plays on the economy with few incentives to talk confidence down.

“It’s not rosy out there and they’re acting that way,” he said, declining to be named.

Revenue is flat to down, record low interest rates and competition are crimping margins, capital requirements are increasing, bad debts are cycling higher, and political and community scrutiny is making it harder to reprice loans.

In rare candid comments by a bank CEO, ANZ’s Shayne Elliott this week conceded it wasn’t the time to chase asset growth aggressively, even if that meant losing some market share. He also promised ANZ would not return to the “good old days” of quickly ploughing any gains from his strategy to shed low-returning institutional loans and sell assets back into balance sheet growth.

“We’ve accepted this is a time to be more cautious about growth from a risk perspective,” he said as losses from soured loans leapt to almost $2bn.

In ANZ’s key Australian operations, revenue grew just 1 per cent in the second half as home loans expanded only 1.6 per cent to $247bn.

ANZ’s comments and the slowdown in lending wasn’t lost on UBS analyst Jonathan Mott, who labelled the decisions “prudent” despite the “cost” of lower earnings per share going forward.

“We’re a bit more cautious ... with strong house price growth, there’s always a risk that could reverse,” Mr Elliott said.

“When you are lending 80-90 per cent of the value of a new home and ... we’ve been used to them going up at double digit (pace), it doesn’t take a lot for them to construct a scenario where they go down at double digit and ... very quickly you can end up underwater.”

Chris Nicol, a strategist at Morgan Stanley, said there were emerging signs that the housing cycle had peaked, citing this week’s sharp pullback in building approvals and negative trading updates from stocks exposed to property. While a “longer dated issue” for banks, he noted that they were already “optimising’ their capital structures “at the expense of growth”.

Andrew Martin, a principal of Alphinity Investment Management, said the confluence of pressure points on banks was leading them to use the same operational playbook of cutting costs and targeting higher returning business. While backing greater lending caution, he added that any pull back in loan growth would unlikely to reduce overall risks.

“If things really hit the fan, they all cop it at the end of the day,” he said.

Catherine Allfrey, a principal at Wavestone Capital, said settlement failures on apartments were the biggest concern.

“We’re at the top of the (property) cycle. I don’t think you can expect the banks are going to grow in a dramatic way,” she said. “For ANZ, at the moment everyone just wants to see them allocate capital wisely and that’s Shayne’s mantra.”

After Macquarie reduced loans, cut 556 jobs and sold assets in the half to September 30, Mr Mott claimed the global funds management and investment banking group may be “battening down the hatches” after years of benefiting from the bond market boom and central bank liquidity.

“Macquarie appears to be preparing for a more difficult environment,” he concluded of the company, which is closely scrutinised by investors for indications on where markets are heading.

He said a sustained sell-off in bonds would leave Macquarie exposed to an “increasingly challenging” revenue environment.

After sinking to a record low of 1.8 per cent in August, 10-year Australian government bond yields have risen around 50 basis points in line with similar moves in US 10-year Treasuries as investors bet on Federal Reserve rate rises, gradual inflation and the eventual unwinding of years of ultra loose central bank policy.

Citi’s Craig Williams said Macquarie’s $855m of gains on asset sales amid high prices was “classic end of cycle phenomena”.