Australian Banks Profitability Threatened By Sovereign Guarantee

Post by Sharat on November 10, 2009 · Under Australian Economy, Business News, Capital Markets, banking · Comment

The former chief executive of Westpac says that Australia’s major lenders would be able to display greater pricing power and enjoy increased profitability, if they weren’t on the receiving end of government support.

David Morgan, who used to run Westpac. says that until the government ceases supporting the banking industry through sovereign guarantees on deposit and wholesale funding, this will not be possible.

Mr. Morgan says that the government guarantee is a threat to profitability and the industry’s ability to offer more innovative products, which will increasingly be regulated whilst Australian banks enjoy the security of sovereign guarantees.

“We have not yet seen, in my judgement, the new found pricing power of the major banks. I believe we have seen a fundamental structural shift that augers well for major bank profitability. For this pricing power to be fully utilised however, the majors will have to do with a good deal less government support than they are currently receiving.” Mr. Morgan said during a corporate finance conference in Sydney.

Though the majors experienced declining profitability during the financial crisis, all four continued to report positive profits, and unlike international rivals, their survival has never been in doubt.

Competition with the Australian banking landscape diminished during the global financial crisis, as international lenders retreated to their core domestic markets whilst Australian majors bought out smaller regional rivals.

Australia’s regional lenders have struggled to compete with the majors, because they have been unable to tap wholesale credit markets at competitive prices, with the market for securitization currently not a viable option.

“The second tier of financial institutions is fast disappearing and rapidly becoming an extinct species. Any standalone financial institution with a credit rating much below double-A will at best struggle to obtain funding on a competitive basis with the Australian majors.” Mr. Morgan said.

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