The annual general meeting season is in full swing and yesterday’s big event saw Bendigo and Adelaide Bank deliver a pretty solemn warning, with investors told to brace for as much as five years of lower growth.
CEO Mike Hirst says that poor business and consumer confidence continues to weigh heavily on demand for credit, making it difficult for banks to grow revenue without resorting to margin-destroying price cuts.
Hirst, and the rest of the banking sector, is also facing the challenge of meeting new regulatory requirements that flow from global changes to banking laws. Essentially, these changes mean the banks will be required to hold more capital – which means they will have a bit less to lend.
“These imposts, combined with the lower level of absolute interest rates, will ensure lower returns from banks than those experienced in the years prior to the global financial crisis,” Hirst told the AGM yesterday.
Hirst’s chairman, Robert Johanson, spoke more plainly.
“If history is any guide, we have some time before this [financial crisis] is over. These financial crises occur regularly and follow consistent patterns and, as such, we should expect this one to last at least another five years and maybe longer.”
Bendigo’s warning is supported by the fact that Bank of Queensland and ANZ have both recently warned that bad debt levels could increase as the tail of the GFC washes through.
While it seems odd that the banks could still be expecting a rise in unrecoverable loans so long after the GFC, it suggest that there are many businesses on their books which have held on and held on and held on, but are now running out of options.
These are likely SMEs, which reinforces the fact that our sector faces a few more patchy years yet.
It also suggests that access to credit issues will persist, notwithstanding the fact that demand for loans looks likely to remain somewhat depressed.
The banks clearly have some ugly stuff in their SME loan books and they are likely to see what happens to those businesses before lending to new ones.
However, Mike Hirst also provided a nice lesson for SMEs yesterday after his warning when he said this about his own company: “Long-term research on companies shows that the best performed firms are those that invest, innovate and grow through periods of difficulty and that is what we plan to do.”
Couldn’t agree more, Mike.
But just remember those rules also apply for SMEs, who will need a good bank standing by them to invest, innovate and grow.
James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
