Politicians the new risk for banks

CAMERON Clyne has singled out politics as one of the main risks facing the banking sector. This is a relatively recent addition to the usual concerns of bank executives, which range from economics to regulation, but it is looming as one of the biggest.

The National Australia Bank chief executive's comments follow a wave of suggestions from Canberra in the past week, ranging from price controls on interest rates to using Australia Post as a competitive threat to the sector.

The biggest headache comes around every month before the Reserve Bank meeting, when the Treasurer warns banks against pushing through extra interest rate rises.

NAB has taken deliberate steps to stay on the right side of Wayne Swan by keeping its mortgage rates in check but it suggested yesterday this was not a sustainable position over the medium term.

A combination of rising funding costs, a war for deposits and the cost to NAB of having a liquid portfolio since June 2007 translates to an extra 118 basis points cost of funding over the Reserve's official cash rate.

NAB has managed to recover 92 basis points of this but remains silent on how it intends to make up the gap of 26 basis points. Only a recovery of business lending would help ease the pressure on margins.

Yesterday Clyne was deflecting questions about out-of-cycle or additional rate rises and the bank's mortgage proposition. Instead, he attempted to direct attention to other initiatives the bank had taken to win over customers - cutting hated fees and charges as well as offering high-interest deposits. Whether these can sustain customers if the bank reprices mortgages remains to be seen.

NAB's latest 19.3 per cent boost in cash profit to $4.58 billion was a welcome surprise after the negative shocks of recent years. The result was boosted by low-quality items, including a second-half tax rate of just 26.5 per cent and a sharp fall in provisions for soured loans.

While the drop in bad debts is good for sentiment towards the sector as well as supercharging headline profits, investors ascribe little value to the billions of dollars that are being unwound from provisioning as this is merely the shifting of funds from one side of the balance sheet to the other.

On Clyne's preferred measure of profit - return on equity - NAB still lags its rivals and is expected to do so for some time. He regards this as a medium-to-long-term project.