How our banks are rolling in it – and remaking themselves: Gottliebsen

Take a step back and you suddenly realise that the Australian banking sector is being transformed as dramatically as any industry in the country.

A major driver of the transformation is the rise in bank profitability. We saw that illustrated by the jump in Commonwealth Bank earnings. Stephen Bartholomeusz estimates that last year bank aggregate profits before tax and provisions increased by more than 20% reflecting the repricing of business loans and higher housing loan margins.

But this underlying profit rise was obscured by $12.8 billion in impairment charges and the $20 billion in new capital that was raised by the banks. Bank return on equity slumped from around 20% to 13.5%. Impairment charges will fall sharply this year causing those rises in underlying profitability to hit the bottom line, which will recover equity returns.

Most of the big banks are not sitting back on their increased piles of money. NAB is in an aggressive wealth management expansion mode and having acquired Aviva and JBWere, it is now making a bid for AXA against AMP. Wealth management businesses are doing well, which helped boost the Commonwealth Bank profit, but NAB’s rival for AXA, AMP, is also a big beneficiary. The unconfirmed word in the market is that AMP will not allow NAB to acquire AXA in Australia at what is a low price and does not want NAB to join the CBA as a third formidable force in the industry. To counter NAB, AMP must come up with a cash offer that is higher.

NAB is also looking hard at acquiring a UK bank. On the surface, NAB would like to sell out of the UK. But the price would be low and banking assets are now available at low prices, so NAB has the chance to establish scale in the UK just as it is trying to establish scale in wealth management in Australia.

Ralph Norris at the CBA moved brilliantly in the crisis and his bank is being transformed by those actions. Not only did he pick up BankWest for what turned out to be a song but when the federal government announced its first home buyers grant Norris backed Canberra to the hilt and went for market share. Westpac took a similar strategy but did not get a BankWest-style boost.

CBA now has its eye firmly on Asia.

And, of course, that’s where ANZ is headed. ANZ will have a major presence in Asia and appears to have turned its back on the AXA opportunity, but the market stories have it looking closely at IOOF – it has recently bought out its partner in the ING group.

One way or another NAB, CBA and ANZ will be transformed. Just as the global trouble was breaking, Westpac bought St George Bank and now CEO Gail Kelly is making Westpac look more like the old St George.

Faced with a rise in the power of the majors, the smaller banks are not finding it easy to match the majors’ local term deposit rates at the long end and their overall aggression.

When CBA and Westpac were taking market share in housing loans NAB did not match. But when Westpac raised its interest rates by more than the Reserve Bank rate increase last year, NAB decided to stay with the RBA increase even though its costs have risen. At the same time they publicly attacked Westpac in a rare display of disunity by the banks. NAB appears to have taken market share, but it is really regaining share lost two years ago.

When you combine the rise in base profitability, the market share changes, the wealth management battle, and the Asian moves of CBA and ANZ, we are seeing movements which will transform the industry. Of course, if profits rise too sharply the government may decide to get much tougher on the banks.

This article first appeared on Business Spectator.