By Malcolm Maiden
RALPH Norris must have known it was coming. The first question the Commonwealth Bank chief took at yesterday's news conference asked how he could explain a $6 billion-plus profit to customers who were being slugged with fees. He was then asked to recount how many consecutive profits CBA had racked up, and when the focus shifted to CBA's deteriorating net interest margin, he was asked whether the bank could justify increasing its lending rates given its record profit.
Norris struggled gamely. He said profitable banks were healthy banks, and that the global financial crisis had shown that unhealthy ones were very bad news indeed.
And he said that while CBA always tried to balance the interests of customers and shareholders, the margin pressure on the group was palpable by the end of the financial year. One always hoped that the pressure would ease, he said, but he was ''certainly'' not in a position to say that it would.
The politics of bank bashing prevented him from saying more, but I can be less diplomatic: pound for pound, CBA didn't make an enormous amount of money in 2009-10. It's just an enormous business that made a normal amount of money, and its margins are now under pressure. If it wasn't a bank, it would probably already have done something about it.
That is not to say the banks are angels. The class action that has been launched against them here will probably show that in the past they charged penalty fees, for example, that exceeded the costs they incurred.
But they've been kicking the fee habit - CBA cut fees by $200 million in 2009-10 - and their profits aren't indefensibly fat. CBA, for example, boosted its return on equity from 15 per cent to 18.7 per cent in the June year. But it has a balance sheet that boasts total assets of $641 billion and risk-weighted assets of almost $291 billion, supported by tier 1, or core, capital of $26.6 billion.
That's one of the best ratios in the world, and all the local banks rate highly. But CBA is still lending about $11 for every dollar of core capital, and as lenders to northern hemisphere banks and their shareholders discovered during the global financial crisis, bank balance sheets are inherently risky conveyances. We talk about banks being safe as banks, that is really a comment about the safety of bank deposits, which are either implicitly or explicitly government guaranteed around the world.
No normal company can sustain the gearing levels that a bank does. For most companies, more than a dollar of debt for every dollar of capital rings alarm bells.
Of course, if the housing market does not collapse in this country, 60 per cent of CBA's loan book is basically worry free. That's the part of the business that caused Don Argus to say that some of our banks are becoming glorified building societies. He didn't say at the time, but he would have had CBA and Westpac in mind.
The rest of the book, including a business-lending portfolio that accounts for 20 per cent of risk-weighted assets, is more risky, however, and as a general observation, bank lending becomes more fraught when the economic outlook is cloudy, as it is here and overseas now while government crisis stimulus fades and economic activity stutters.
The weakness was evident in a 3 per cent fall in CBA's June-half operating income compared with the December half, and while the group's net interest margin (NIM) rose from 2.08 per cent to 2.13 per cent in the year, in the second half it declined, from 2.18 per cent to 2.08 per cent.
That was the first contraction of NIM for the bank since the crisis peaked in the second half of 2008, and it came from several sources.
The banks are, for example, fighting with each other to build their deposit funding after the crisis and the near-collapse of wholesale debt market funding alternatives. Regional banks that can less easily access the still-fragile debt markets are particularly active in the hunt for deposits, but all banks are offering relatively high deposit rates, and accepting relatively low margins as a result.
They are also paying higher rates to replace pre-crisis debt that is maturing. CBA says the process will not peak for a year and is costing it about 2 basis points extra a month across the group, and twice that in the retail bank. And they are reconfiguring their balance sheets at the behest of regulators to contain more long-term debt that costs more than short-term money, and more government assets that yield less than the private sector ones they are replacing.
For CBA overall, wholesale funding costs have risen by 89 basis points since the crisis began in mid-2007, deposit funding costs have risen by 1.46 percentage points, and total funding costs have risen by 1.22 percentage points.
In the same time, the bank's variable mortgage rate has risen less, by 1.04 percentage points - and its funding costs are still edging higher. The Reserve Bank, meanwhile, hasn't moved rates up since May, and could be on hold until the end of the year.
My conclusion: the case for a unilateral bank rate rise exists, and it is growing stronger. Whether its politically feasible, given the penchant for bank bashing, is another thing entirely.