Yesterday the Commonwealth Bank of Australia (CBA) confirmed its interim dividend would match last year’s dividend of $1.13. At a time when dividend payouts are being viewed as a sign of health or sickness for listed companies, it is a positive outcome.
If you are someone who relies on dividend income, then it is equally comforting to know this is one ‘pay-cheque’ that hasn’t been slashed.
So, does this mean that everything is fine in the world of banking? As far as we’re concerned, it is still too early to say. Sure, you can buy the shares today on a yield of 10%, but it still can’t be guaranteed the bank will maintain the full year dividend.
Like the rest of the banks, they are trading with such a high yield because of the risk dividends will be cut. And seeing as the full effects of the economic downturn are yet to fully wash through the economy, there is still ample movement for financial shares to look even worse in six or twelve months time.
But that’s only part of the story. You see, when the CBA reported its half yearly results to the end of December, it didn’t have to take into account the BankWest acquisition. Which is fair enough, considering the deal was only closed on 19th December.
On the plus side for CBA, it buys the bank some time. Quite a bit of time in fact, as it won’t need to release further financial details on the financials of the combined entity for another four months…
Unless something significant happens between now and then.
You only have to look at the delayed impact of recent banking mergers in the US and UK to see that it was many months after the mergers were sealed that the real problems began to emerge.
One making the headlines in the UK at the moment is LloydsTSB’s acquisition of HBOS which created the Lloyds Banking Group plc.
Believe it or not, that merger was inked – subject to shareholder approval – on 17th September last year. Time flies when you’re having fun!
At the time, the BBC said the deal would create “a banking giant which will hold close to one-third of the UK’s savings and mortgage market.” And now? Well, now the UK government is in the process of increasing its stake in the “giant” to 80% after the bank announced profits would fall by 80% due to larger than expected losses from the HBOS business.
HBOS, of course, was the bank that owned BankWest prior to December last year.
The major question we need to consider is whether the BankWest business operated in complete isolation to the UK business, or whether the same or similar banking practices were copied here?
At the moment we just don’t know. All we do know is that CBA paid HBOS $2.1 billion. At the time is was touted as the deal of the century. The opportunistic Australian bank ’stealing’ the business away from a troubled UK parent.
So far Australian banks have weathered the storm comparatively well. With the exception of exposure to corporate failures such as Allco Finance, Babcock & Brown and ABC Learning, they have been able to avoid the disasters that have struck banks overseas.
So far. And whether it can last or not is another matter. BankWest’s concentrated exposure to the Western Australia housing market has the potential to serve up some surprises for the CBA.
As you can see from the chart below, housing approvals almost tripled from the depths of 2000 until the market started to peak in late 2007…
Since then approvals have slumped. To the extent they are now almost back to the 2000-2001 level. And that must have the banks worried. Especially as the full effect of the downturn has yet to be realized.
The approvals stats only show us one thing though. It shows us the demand for new housing has hit the skids. That is likely to mean the demand for existing housing is equally soft.
In turn that will have a negative impact on house prices. In fact, according to the Australian Bureau of Statistics (ABS), house prices in Perth have fallen the most out of the eight capital cities it measures.
For the year until the end of December, Perth house prices fell by 6.7%. The next worse cities were Melbourne and Canberra on 4.1%.
Of course, the biggest impact may not be in the metropolitan area of WA. With mining operations being cut back, thousands of workers have already been laid off, and thousands upon thousands look set to follow.
Naturally there will be a significant lag between mines closing, workers losing their jobs, and loan repayments not being made. For that reason, while banks have been let off the hook so far, it is too early to tell if that good fortune will last through the next reporting season.
Other Stuff on the Markets
The US market gets hammered again. The Dow Jones Industrial Average has only had 16 positive trading days this year out of a possible 45.
The ASX and Standard & Poor’s made a raft of changes to the indices last week. Finally chopping out some notorious stocks that made the headlines for all the wrong reasons last year. We’ll take a look at the new index some time this week.