The big banks may have impressed with their record profits this week, but the outlook for the sector is fragile, with an expert warning a reluctance by SMEs to re-engage with banks and borrow to fund growth could have significant implications for Australia’s economy.
Paul Dowling, principal analyst at business banking research firm East & Partners, says he would be surprised to see ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Group beat the record first-half results in a year’s time.
The big four banks have reported $11.9 billion in first-half profits, with cash earnings up 16% from the previous corresponding period. NAB yesterday impressed with a $2.7 billion profit, reporting a lift in market share for both business lending and mortgages.
Dowling says while the banks have reported “fundamentally good” interim results, there are concerns about the sector’s “fragile outlook.”
“The real concern for markets generally is flat credit,” Dowling told SmartCompany.
Notwithstanding a modest pickup in business lending in March and April, business lending growth is still anaemic, he says, with Evans & Partners expecting just 4% growth for the year ahead.
For SMEs, Dowling notes deleveraging and a “clear lack of confidence:” He says that outside of the resources sector, there’s no macroeconomic driver pushing growth.
He also believes the weak credit-demand can be partly attributed to the behaviour of banks during the GFC, with many SMEs now preferring cashflow-based solutions than secured mainline borrowing.
“The banks are saying, ‘We have money to lend’, but in some respects, they’ve kind of shot themselves in the foot,” Dowling says.
“SMEs are saying, ‘We’re not looking for debt-funded growth because of what you did to us [during the GFC]’.”
“So the paradigm has shifted in an interesting way, we think, with SMEs conditioned to look elsewhere.”
Dowling says the trend is worrying.
“This is where innovation and the rump of employment is,” Dowling says.
“We’ve got a significant portion of SMEs not particularly focused on growth, so there’s some very serious flowthroughs for economy at large.”
He believes the big banks need to come back to customers with well-argued reasons why more debt-funded growth is good for their business, and reassure them that what happened over the GFC period won’t happen again.
“For banks, this has significant implications for their outlook.”
Meanwhile, accounting giant KPMG has defended banks against criticisms they make excessive profits.
“They’ve grown bigger through consolidation, but if you look at return on equity, they’re not making excessive profits,” Michelle Hinchliffe, head of financial services at KPMG, told SmartCompany.
Hinchliffe says the challenge for the big banks is building revenue momentum, noting a drop in impairments had played a key role in some of the results.
“Growth has to come from revenue momentum because lending growth is subdued, the business banking size of the balance sheet is up by less than 1% versus retail at 3%,” she says.
She also points to less-than-stellar performance from wealth operations, and large payouts from insurance operations.
In positive news for SMEs looking to expand, Hinchliffe says both NAB and Westpac have made positive noises about business lending picking up.
“It’s not purely a supply issue; it’s a demand one,” she says.
“Business lending hasn’t picked up to date, and for future growth, it does need to pick up.”
And amid concerns about Australia’s house prices, Hinchliffe says the big banks are not overexposed, and could withstand a fall of up 20% without a significant impact on loan losses.
Smart Company is a sister publication to The Mandarin, catering to Australia’s entrepreneurs, small and medium business owners and business managers.
