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Australia banks may be safe haven in global storm

Shares in big Australian banks such as National Australia Bank and Commonwealth Bank have fallen less than the broader market since a sell-off began in early November.

business Updated: Jan 24, 2008 11:57 IST
Denny Thomas

As major bank stocks around the world stare down the barrel of a credit crisis that is bruising balance sheets, Australian banks, with their domestic focus and low exposure to subprime mortgages, look a relative safe haven.

Shares in big Australian banks such as National Australia Bank (NAB.AX) and Commonwealth Bank (CBA.AX) have fallen less than the broader market since a sell-off began in early November, with investors flocking to lenders for their attractive dividend yields and valuations.

Australian banks have been largely unscathed by the global credit crisis, although their exposure to the property sector, in the spotlight following the high-profile refinancing troubles of Centro Properties Group (CNP.AX), is seen pushing up bad debts.

"You would probably buy Aussie banks as they are less traumatised relative to global banks," said Paul Biddle, portfolio manager with Souls Funds Management. "The underlying earnings don't look like they are going to plummet into the red as in the U.S. But profit growth is going to slow."

Investors draw comfort from Australian banks' diversified loan book and their lack of direct exposure to distressed subprime mortgages that have caused billions of dollars worth of write-downs at many global banks.

Less than 2 per cent of Australian banks' A$900 billion ($790 billion) outstanding home loans are in the subprime sector.

"I wouldn't be surprised if there are some small, specific provisions related to Centro, but it would not be significant as the majority are Australian retail assets and the value of those is pretty robust," said Jarrod Martin, analyst with ABN AMRO.

Centro and its affiliates are struggling to refinance A$3.9 billion ($3.5 billion) of maturing debt by February 15.

The banking sector sub-index (.AXBAK) lost 14.5 per cent since start of November to Wednesday's close, compared with a 20 per cent fall in the benchmark S&P/ASX index (.AXJO).

Martin said investors don't have immediate reason to panic since the Centro episode is not yet an industry-wide problem.

Unlike in the United States, residential property prices in Australia rose about 11 per cent last year while commercial property prices and rents have also held up well.

In addition, Australia's top four banks now offer investors about a 6 per cent dividend yield, the highest in a decade, while the average price-to-earnings ratio of the top four banks has fallen to 11.6, the lowest in about four years.

Australia and New Zealand Banking Group (ANZ.AX) and Westpac Banking Corp (WBC.AX) complete the top four.

EARLY WARNINGS

Rising funding costs threaten to crimp banks' profits but, with Australian unemployment at three-decade lows and the economy still growing robustly, they are at least able to pass on some of those higher costs to consumers to ease the pain.

Analysts also say the Centro debacle will make them more vigilant about lending to the property sector.

"Banks might sharpen their pencils a bit more on property values," said James Holt, portfolio manager with Zurich Financial Services. "They will demand a lot of more transparency while lending to the property sector."

Banks are reluctant to divulge their Centro exposure but some media reports said Australian banks lent about A$4 billion to the property group. Analysts estimate banks' total exposure to the property sector at just 6.3 per cent of all outstanding loans.

A crash in commercial property prices in early 1990s turned some lenders cautious about property lending and valuations.

"A couple of them went through near-death situations 15 years ago and that type of corporate memory is not lost. So their concentration risk has been very well managed," said ABN's Martin, adding that Australian banks were far more conservative than their global counterparts.

While some investors are comfortable about Australian banks' lending standards, others caution that they have chased growth at the cost of quality at times.

"Banks haven't learnt from their previous mistake. If they had, they wouldn't have lent to Centro," Souls' Biddle said, adding that lenders could face serious trouble if underlying asset prices were to decline.

($1=A$1.14)