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Australian Banks in Focus

The ‘Big Four’ as they are colloquially known consists of Westpac, ANZ, Commonwealth Bank (Owner of ASB in NZ) and National Australia Bank (BNZ). All four have their respective strengths and weaknesses, and all four have a heavy presence in New Zealand. This article bypasses the conversation over which bank will offer investors the best bang for the investors buck and looks at the Australasian banking sector as a whole.

The Big Four boast some of the highest net interest margins in the world, all managing to skim approximately 2 percent on average between lending and deposit rates (put very simply). These margins are on the wane though as banks compete hard for customers struggle to maintain higher margins in a low interest rate environment.

The Big Four have also shown good resilience in tough times. The companies came through the worst of the Global Financial Crisis relatively unscathed, and have since thrived producing very good return on equity on the back of a thriving housing market in Australasia and a dominant share of the home loan market.

It is the exposure to the red hot housing market that has some worried. The Abbott government commissioned a Financial System Inquiry, the results of which were released late last year. This report recommended “setting Australian bank capital ratios such that they are unquestionably strong”, and that banks “maintain loss absorbing and recapitalisation capacity.” The report also recommended regulation to narrow mortgage risk weights. Put simply, these changes would increase the amount of capital held for each dollar of lending.

This raises the spectre of capital raisings across the entire banking sector. National Australia Bank kicked this off with Australia’s largest ever rights issues, raising AU$5.5 billion with the intent of putting “NAB in a strong capital position following anticipated regulatory change.” As of yet, these regulatory changes are still just “anticipated”, but most see them as inevitable.

Capital raisings are seldom beneficial for share prices in the short term, which is why the prospect of them has seen the respective share prices of the Big Four fall between 13 and 20 percent since hitting all time highs in March and April. New Zealand investors also get limited tax credits on their Australian dividends making the yield relatively unattractive for local investors.

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