The outperformance of Australian Banks

THE BIG PICTURE: The outperformance of Australian banks
Monday, 23 January 2012 08:51
Craig James
 
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The Global Financial Crisis and the more recent European Debt Crisis have led to a major shuffling of the pecking order of global banks. Chinese banks now dominate the rankings of the world's largest banks, but probably the biggest surprise has been the performance of Australian banks.
Quite remarkably Australia now has four banks in the world's top 22 when ranked by market capitalisation in US dollar terms, according to banking website, www.relbanks.com. Commonwealth Bank ranks as the 10th biggest bank ($80 billion), just behind Citigroup, with Westpac in 15th spot ($65 billion), followed by ANZ (19th ,$57 billion) and National Australia Bank (22nd ,$53 billion). This is clearly a big change from just three years ago when there was only one Australian bank in the top 20 and two in the top 25.
In part the relative out-performance of Australian banks reflects a stronger currency. The ranking of world's banks is in US dollar terms and at the end of 2008 the Aussie dollar stood at US69.3 cents, compared with current levels just below US104 cents. But the higher rankings clearly also reflect the fact that the Australian banking system has remained strong in recent years, in contrast to the woes experienced in Europe and the United States.
Currently four of the seven biggest banks in the world can be found in China, with Industrial and Commercial Bank of China (ICBC) leading the rankings (US$211 billion) from China Construction Bank (US$175 billion) while Wells Fargo Bank in the US ($157 billion) is in third spot. Interestingly in the top 22 banks, there are five banks from the US, four each from China and Australia, three from Canada, two from Brazil and one each from the UK, Russia, Spain and Japan. Other notables in the top 40 banks are UBS (25th), BNP Paribas (26th), and Deutsche Bank (37th).
Australian banks have been amongst the biggest winners over the past three years, but so have Canadian banks. At the end of 2008 there was just one Canadian bank in the top 22, now there are three. It is widely perceived that Canada and Australia vie for the title of the strongest banking system in the world and that seems to be borne out by the bank ratings. There are also two Brazilian banks in the top 22, compared with one back in 2008; and one Russian bank now compared with none in 2008.
As would be expected, European banks have slid down the rankings over the past three years. At the end of 2008 Italy had two banks in the top 22 – now there are none; while Spanish banks have fallen from two to one.
As is always the case, the challenge is for banking regulators to keep Australia's banking system in good shape. The secret to a strong economy is a strong financial system.
The week ahead
In Australia the coming week is all about inflation. But the offerings in the US are more varied with economic growth data and a meeting of Federal Reserve policymakers the highlights.
In Australia, the week kicks off with the producer price index (business inflation data) to be released on Monday. There are usually two influences which can cause sharp swings in the business inflation data – the Aussie dollar and oil prices. But that doesn't appear the case in the December quarter figures. We say, "it doesn't appear" as while the Malaysian Tapis oil price eased by 1.2 per cent in the quarter, the US Nymex price soared by 25 per cent. Australia generally imports oil from Asia, and if that is again the case, then business inflation could well be restrained. Notably the Aussie dollar rose by 4-5 per cent over the quarter, keeping down prices of imports.
But the main focus in the coming week will be the consumer price index (CPI) on Wednesday. In the September quarter, inflation was well contained with the headline rate up 0.6 per cent and underlying measures up 0.3 per cent. And with consumers reluctant to spend, putting pressure on retailers to discount prices, inflation should have been similarly well restrained in the December quarter.
In the December quarter, petrol prices probably rose by around 1 per cent while house prices were flat, fruit and vegetable prices were restrained and prices of a raft of imported goods likely eased again in response to the firm Aussie dollar. In short, few goods are getting more expensive.
In its latest monthly inflation gauge, TD Securities and Melbourne Institute believe that both headline and underlying prices rose by just 0.2 per cent in the quarter.
In the US, the week gets off to a tame start with no major events scheduled for Monday. On Tuesday the Federal Reserve kicks off a two-day meeting while the influential Richmond Fed manufacturing index is also released. The upcoming Fed meeting will be the first time where there will be a tabling of members' views about where interest rates are headed. At this stage analysts are divided whether this measure will actually improve transparency or muddy the waters further, but it is certainly something to watch.
On Wednesday the pending home sales index is released together with the November reading on home prices from the Federal Housing Financing Agency. And on Thursday the Chicago Fed index is released together with data on durable goods orders, new home sales and the leading indicators series. Orders are tipped to rise by 1.8 per cent and the leading index expected to rise by 0.7 per cent.
And on Friday the first take on economic growth in the December quarter will be issued alongside consumer sentiment data. Economists estimate that the US economy expanded at a 3.0 per cent annual pace in the quarter, up from the 1.8 per cent annualised pace in the September quarter.
Also of note in the coming week, EU finance ministers meet on Monday with the IMF to update its economic forecasts on Tuesday. On Wednesday the World Economic Forum begins while Reserve Bank New Zealand announces the official cash rate on Thursday and the EU summit begins on Sunday January 29. Government bond auctions are scheduled in the Netherlands, Denmark, the UK and US on Tuesday; Germany, Canada and the US on Wednesday; and Japan, Italy and the US on Thursday.
Sharemarket, interest rates, currencies & commodities
The US profit-reporting season continues in the coming week. Of companies in the S&P 500 index, reports to watch out for on Monday include Texas Instruments and Haliburton. On Tuesday, Apple, Johnson & Johnson, McDonalds and Yahoo! issue their results. On Wednesday Boeing, ConocoPhillips, E*Trade and Motorola are expected to report. Caterpillar, Eastman Kodak, 3M, AT &T, and Time Warner report on Thursday, while Chevron, Procter & Gamble and Altria are amongst those to report profit results on Friday.
In the commodities market, an indicator that many investors find useful is the Baltic freight index – a gauge of freight costs for dry commodities like iron ore, coal and wheat. And the recent trends are quite sobering. Over the past month the Baltic Dry index has plunged by 51 per cent, hitting the lowest levels in three-years. While the fall over the short-term has been dramatic, it pales when comparing the medium term performance. The Baltic Dry index hit a record high of 11,793 in May 2008 and now stands at just 926.
In part, sea freight rates have fallen because there is a surplus of vessels. Clearly back in 2008 the world was crying out for more ships to be built, but the new production has come on at a time of softer demand. Not only has the European Debt Crisis led to a downturn in global trade, but the engineered slowdown in the Chinese economy and weather disturbances have also put downward pressure on freight rates.
Freight rates on the larger Capesize vessels that transport iron ore and coal have fallen even more sharply, down by 56 per cent since the middle of December. But the lower freight rates could actually prove positive for Australia's coal and iron ore exporters, encouraging greater purchases by Asian buyers, especially if central banks continue to ease monetary policy.
Traders are almost convinced that the cash rate will be cut again in February. Clearly much depends on the coming week's inflation data but currently financial markets have priced in an 87 per cent chance that rates will be cut 25 basis points on February 7. Another 25 basis point rate cut is fully priced in over the next six months.
Craig James is chief economist at CommSec.