KEY POINTS:
Few things grate the public more than the idea of their bank making super profits, year after year, seemingly regardless of the state of the economy. But one thing guaranteed to cause more sleepless nights than a bank with bulging profits is one that's in financial trouble.
American
banks and some in Australia are now starting to see last year's credit crunch making a dent in their own profits.
A Reuters report last week showed US bank earnings plunging 83.5 per cent in the last quarter of 2007 to a 16-year low - from US$35.2 billion ($43.3b) in the same period the year before to US$5.8b ($7.1b).
US banks set aside a record US$31.3b for loan losses in the fourth quarter of 2007 and the industry's delinquent loans jumped 32.5 per cent to US$26.9b, the biggest quarterly percentage rise in 24 years.
Federal Reserve chairman Ben Bernanke has been aggressively cutting interest rates to try to protect the US economy from the worst effects of a falling housing market and illiquid credit markets.
Effects of the instability in America are being felt across the globe and closer to home.
Australia and New Zealand Banking Group, Australia's third-biggest lender, and parent company of the ANZ National Bank here in New Zealand, says it may face a US$200 million ($252m) hit on its exposure to a US bond insurer.
This news came after one of the other big Australian banks, the Commonwealth Bank of Australia, scared investors by missing profit estimates because of higher provisions and funding costs.
But things on this side of the Tasman are still looking pretty good for ANZ National which posted a 12 per cent rise in net profit after tax for its December quarter.
Its impaired asset provisioning, which is money set aside to cover bad loans, has risen from $25m last year to $32m now.
This, says the bank, should be seen in context of its $90b loan book.
So does the global credit crunch, coupled with a slumping residential property market, means our banks are going to start pulling back from lending? And are their profits about to take a hit?
ANZ National Bank chief executive Graham Hodges told the Herald on Sunday that the same formulas used when working out how much to lend customers are in place during good times and bad - essentially a focus on "uncommitted monthly income" of households. "We don't want to lend money to customers who can't afford it," he says.
But the proportion of a house's value that the bank would lend on - the loan to value ratio (LVR) - are now shifting.
"Where there might be a little bit of a change is in an environment where you could prospectively see house values coming off," he says.
"I think we have seen some evidence that is happening in part - not everywhere - but in part. We would tend to be a bit more conservative in the loan-to-value ratio that the bank might lend against."
While the capacity to service a loan was more important, "It probably does mean you are less inclined to do fully lent deals".
Hodges is positive about the strength of the New Zealand business sector, but says there are obvious signs of stress around the property sector.
"Gearing levels are still relatively low across business, so they're in pretty good shape - the cashflows have been pretty good. So the capacity of NZ bushings to withstand a quieter economic time, if that were to come, is still reasonably good."
There are players in the property development sector, however, who will find things tough in the next 12 to 18 months. Many have gone to finance companies rather than the banks, who deal more "on the margins" than with sustainable business.
"It is those players that will find life harder and it's not clear to me that the main banks will step in and take those customers on," says Hodges.
"I think there is a likelihood that some of those customers will hit the wall. There will be a flow-on effect [to] those properties that are partially developed, haven't started being developed or have been developed but not yet sold. There will put some further pressure in the market place."
Both the New Zealand and Australian banking operations are healthy, with high levels of capital.
"We run as a separate banking entity here," says Hodges. "We have very high levels of capital - well more than we need for regulatory purposes, we have our own funding programmes which we do as a separate bank here, we are very comfortably funded with very high and conservative levels of liquidity around it.
"The economies in both countries are in reasonable shape, with Australia a stronger economy, probably stronger than here, but very high-quality portfolios and great ratings for the bank.
"Again, we would see the potential for a slowdown in the economy through 2008 - that's a slowdown - there's still growth, slower growth, not negative growth.
"That's an environment that means you get less profit growth, but you still get profit growth - that's not a negative environment.
"I would say they're reasons to be watchful for the 12 months out, because New Zealand does not stand alone from the global market place, but certainly there is still going to be growth in the economy."
Massey University's head of banking studies, David Tripe, says attempts to more clearly separate the local operations of Australian banks from their parents is unlikely to make much difference if things really get tough. He thinks the banks are in fairly good shape financially.
"I would be much more worried about the New Zealand situation if there were signs that the Australian banks were weak, because even though they are supposedly separate and all that, if there is trouble in one place you can be pretty sure there'll be trouble elsewhere," says Tripe.
"People don't like them making a big profit, but it's better to have a solvent bank than an insolvent one."
During the last economic down- turn in 1997 and 1998, says Tripe, there was little impact on the profitability of banks.
"If you look at the banks' figures, you would struggle to find any evidence of it. They are relatively conservatively managed."
A property slump does not necessarily mean banks will quickly start throwing people out of their homes in mortgagee sales, says Tripe.
"They are not perfect, but their portfolios are mainly in housing. If there is a housing market downturn, then banks don't in general rush around trying to sell every property that moves because it doesn't actually do them a whole lot of good.
"It just crystallises the losses. Banks will usually look for a way to keep people in their houses because it's much easier for everybody if you've got that situation.
"That's something they would generally prefer to avoid. It's also time- consuming dealing with mortgagee sales. It really does chew into what you otherwise might be doing.
"The banks know that there is a prospect - they should know that there is a prospect of some economic downturn. I think in the current environment they are going to be a little more cautious about lending."
