Banks' boom cooling slowly

Weaker growth in the underlying profitability of the major banks last year could be a pointer to a slowing economy, KPMG's financial services group deputy chairman says.

Godfrey Boyce, releasing KPMG's annual review of the sector yesterday, said the banks' underlying performance - profits before tax, abnormals, goodwill amortisation and provisions for doubtful debts - had risen 4.3 per cent last year compared with 12.3 per cent in 2003 and 16.7 per cent in 2002.

"We are coming into a period where profit growth will level off. Anything over 5 per cent will be good going," Boyce said.

Part of the reason for declining profit growth has been borrowers' strong and increasing preference for fixed-rate mortgages.

The banks earn an interest rate margin of about 1 per cent on fixed rate loans compared with 1.9 per cent on variable ones.

During the "mortgage war" in the December quarter last year, Boyce said the interest margin on fixed-rate loans briefly dropped to half a percentage point, "for the first time in my memory".

The survey shows the major banks' margins under pressure before the mortgage war. But while down on 2003, margins are still higher than in Australia, where they have been on a steady down trend for at least the past eight years.

If the economy is heading for a hard landing, the banks seem well prepared to cope. "Credit quality is very good," Boyce said.

The banks' provisions for bad debts is 2.5 times the level of non-performing loans and 10 times the level of loans actually written off.

KPMG is less sanguine about the finance company sector, however.

Last October, the Reserve Bank warned about finance companies exposed to the property market.

Boyce said investors should look at the variation among the companies in levels of gearing, the ratio of equity to total assets.

KPMG said among the companies in the property development/commercial finance sector, the five largest companies maintained a strong combined gearing ratio of 10.8 per cent.

But it noted that two new participants in the sector, Lombard Finance and MFS Pacific Finance, had much lower gearing of 0.9 per cent and 5.7 per cent respectively.

The survey noted an increase in bad debt write-offs and provisioning for doubtful debts by the finance companies last year, though it remains small in relation to their total loan books. The overall level of provisioning looked to be on the light side, the survey suggested.

"In light of the types of activities being carried out by certain companies in this sector, this ratio appears modest, particularly compared with the provisioning coverage in the registered banks sector."

Boyce said KPMG welcomed the increased regulatory interest in the non-bank sector.