It is not just the MSM (which I assume stands for the Mainstream Meeja), that has rushed to see the good side of the downgrade of the banks. Brokers are acting as apologists, too. Which is to be expected considering how large the banking sector is as a proportion of the All Ords. If about a fifth is under pressure, as might be concluded from reading MacroBusiness, that is an awful lot of brokerage in peril. In the end, analysts and brokers have a heavy bias towards buy recommendations, and are disinclined to be bearish. Deutsche Bank is very relaxed about the Moody’s downgrading.
We do not believe Moody’s downgrade will materially impact bank funding costs. The one notch ratings downgrade merely brings Moody’s ratings in line with the S&P and Fitch ratings. The issue for the rating downgrade is also nothing new, i.e. the reliance on the wholesale funding market. If anything the reliance on wholesale funding is less in recent years given the increase in long term funding and the strong growth in deposits.
Well, perhaps not as exposed, but still very exposed. JP Morgan makes a similar point:
• Overall, Australian major banks have done a lot of ‘heavy lifting’ to transform their funding profiles since the onset of the GFC in 2007. There has been a clear transition from short term wholesale funding (reduced from ~30% to ~20%) to customer deposit funding (increased from ~45% to ~55%) (refer Table 1). We expect these improvements to continue, given the introduciotn of the Net Stable Funding Ratio.
• In our view, ANZ’s deposit gathering focus, strong capital levels, modest short term wholesale exposure, combined with the ‘least full’ term wholesale funding profile, provides a superior peer-relative funding position if investors are wary of offshore wholesale funding markets.
Yes, there has been a shift from potentially perilous short term funding to longer term funding, but consumer deposits, although they have risen by about 10% of the total since 2008, are still below 60% of the total. Banking profitability largely depends on expanding the rather bloated and shaky looking housing market but at least we have UBS to reassure us:
The 2% q/q fall of house prices in Q1 has seen Australian housing again catching the attention of investors. Overall, we see housing as undergoing a cyclical ‘soft patch’ within a subdued trend, rather than a long awaited ‘structural slide’. Clearly, housing has weakened recently, but there are some signs of a trough. Looking at the cyclical indicators: the sharp downtrend of construction finance and building approvals in recent months pose risk to our forecast for starts of 155k in 2011.
No glance at the after inflation returns. Morgan Stanley is different, sounding a bearish note
We were disappointed with reporting season from the major banks, and we think there are now more investment negatives than positives. In particular, the revenue growth outlook is challenging, and we feel that pressure on households and small businesses from the two speed economy points to risk of disappointment on loan loss outcomes beyond the current year. Despite this, we retain our In-Line industry view given reasonable near term earnings certainty and challenges facing other sectors in the ASX200.
So the conclusion is clear. We are living in parallel universes. With a few notable exceptions, in broker land sees the banks just hitting the odd bump, but it is business as usual. For those who caste a sceptical eye over the heavy dependence of the banks on mortgage lending, they’re in the Twilight Zone.