Banking on Scotsmen to ring the changes

By Peter V O'Brien

Friday 21st May 2004

Investors in New Zealand-listed Australian banks got reasonable news in their companies' reports for the six months ended March.

Even National Australia Bank (NAB) produced an uneventful result, given its problems in European operations and the foreign currency options trading affair were signalled earlier.

The three organisations, (Australia and New Zealand Banking Group, NAB and Westpac Banking Corporation) rarely obtain uniformity across their internationally diversified operations and individual business sectors.

ANZ chief executive John McFarlane crystallised the nature of banking when he said it was a "complex and cyclical business."

"We recognise there are concerns regarding the maturity of the banking industry and its position in this economic cycle, particularly with a rising interest rate environment, a softening housing and consumer sector and an ongoing focus on corporate governance. While the move toward stronger regulation globally will have its positive effects, it also comes at a cost."

Most of the general comment in Australian bank reports relates to their home economy, except when specific reference is made to other countries. It is still a good guide to prospects, because Australia provides most of their profit.

Wetpac's reports to the stock exchanges include a short rundown of likely trends in its main markets.

The latest said the Australian economy had continued to perform well with strong growth and the bank anticipated little change in the overall growth outlook.

Composition of growth was expected to change, with lower consumer spending and dwelling expenditure offset by increased business investment and an improving net export position.

Westpac said the New Zealand economy had performed similarly to Australia's, although growth had eased recently with softer business confidence and lower migration levels.

The bank had established a sound base for the rest of the year and was positive about the outlook for solid earnings growth in the full.

ANZ's McFarlane had a similar approach, saying the domestic and international environment was in a positive phase.

The company's strength, particularly in the corporate area, "should be an advantage in the period ahead."

McFarlane considered the environment sufficiently favourable for ANZ to be confident about its prospects for the full year.

Optimism was more restrained at NAB.

Chief executive John Stewart said his future priorities were to lead the bank's "required cultural change," review its business strategies and approach to risk management to make sure it had a sustainable platform for future growth.

He has a tough job, particularly as he will soon have six directors with little experience of the bank.

They and a revamped executive group have to make the "required cultural change" and promote the organisation's growth in an intensely competitive banking environment, which also has to cope with fluctuating currency rates.

NAB has the biggest exposure to Europe, for example.

Its report showed a 37.1% decline in retail banking operations in Europe, which adjusted to 27.5% in local currency. That showed the effect of a strong Australian dollar in the period, when translating overseas figures into the consolidated, Australian dollar-denominated accounts.

Investors were fairly lenient on NAB, reducing the share price only 3.6% since November, when The National Business Review last considered the sector, and 9.4% over the past year.

ANZ and Westpac were hardly sharemarket stars during both periods but at least improved in the past six months.

The market reacts quickly to matters perceived to have a negative impact on banks, making the institutions' share prices vulnerable to every local and international economic breeze.

They carry a built-in discount to account for the imposed regulatory framework in which they operate, a framework that includes minimum capital requirements.

The basic discount and general market caution about bank shares was reflected in their historic price/earnings.

ANZ sold on a p/e of 11.5, NAB on 10.6 and Westpac on 13.7. Prospective multiples would be a little lower, depending on one's assessment of full-year profit but not by much because a profit gain of much more than, say, 15% is a good result for an Australian-based bank.

ANZ and Westpac seem better bets than NAB in view of the NAB chief executive's reported comment that it would take two years for recovery.

Stewart could have been unduly cautious, but he is a Scot, as is his counter McFarlane at ANZ.

The Scots have done well in finance since they turned from battles with the English after being massacred at Culloden, moved south and massacred the old enemy in the boardroom and the banking chamber.

They have now moved about as far south as bankers can go.

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