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AUSTRALIA
COMMERCIAL BANKING REPORT
INCLUDES 5-YEAR FORECASTS TO 2018
ISSN 2041-5532
Published by:Business Monitor International
Australia Commercial Banking
Report Q2 2014
INCLUDES 5-YEAR FORECASTS TO 2018
Part of BMIs Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: February 2014
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CONTENTS
BMI Industry View ............................................................................................................... 7
Table: Commercial Banking Sector Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table: Commercial Banking Sector Key Ratios, November 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table: Annual Growth Rate Projections 2013-2018 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table: Ranking Out Of 71 Countries Reviewed In 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table: Commercial Banking Sector Indicators, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SWOT .................................................................................................................................... 9
Commercial Banking .................................................................................................................................. 9
Political ................................................................................................................................................. 10
Economic ............................................................................................................................................... 11
Business Environment .............................................................................................................................. 12
Industry Forecast .............................................................................................................. 14
Rising Loan Losses And Regulatory Burdens To Increase Costs ...................................................................... 15
Domestic Economic Weakness To Weigh On Revenue Growth ........................................................................ 16
Industry Risk Reward Ratings .......................................................................................... 17
Developed States Commercial Banking Risk/Reward Ratings ........................................................................... 17
Table: Developed States Commercial Banking Risk/Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Market Overview ............................................................................................................... 19
Developed States Commercial Banking Outlook ............................................................................................ 19
Table: Banks' Bond Portfolios, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP Ratios, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table: Comparison of Total Assets & Client Loans & Client Deposits (US$bn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table: Comparison of US$ Per Capita Deposits, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Macroeconomic Forecasts ......................................................................................................................... 21
Ongoing Misallocation Of Capital Increases Risks ....................................................................................... 23
Increasing Pressures For Greater Macro-Prudential Rules ............................................................................ 24
Table: Australia - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Competitive Landscape .................................................................................................... 27
Market Structure ..................................................................................................................................... 27
Protagonists .......................................................................................................................................... 27
Table: Protagonists In Australia's Commercial Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Definition Of The Commercial Banking Universe ......................................................................................... 27
List Of Banks ......................................................................................................................................... 28
Table: Major Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table: Other Domestic Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Company Profile ................................................................................................................ 29
Bendigo and Adelaide Bank ....................................................................................................................... 29
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 4
Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Table: Balance Sheet (AUDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Table: Balance Sheet (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
AMP Bank .............................................................................................................................................. 33
Table: Balance Sheet (AUDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table: Balance Sheet (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Westpac Banking Corporation ................................................................................................................... 36
Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Table: Balance Sheet (AUDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Table: Balance Sheet (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
National Australia Bank ............................................................................................................................ 39
Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Table: Balance Sheet (AUDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Table: Balance Sheet (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Commonwealth Bank of Australia ............................................................................................................... 43
Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Table: Balance Sheet (AUDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Table: Balance Sheet (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Australia and New Zealand Banking Group .................................................................................................. 46
Table: Stock Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table: Balance Sheet (AUDmn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Table: Balance Sheet (US$mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Table: Key Ratios (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Global Industry Overview .................................................................................................. 49
Global Commercial Banking Outlook .......................................................................................................... 49
Regional Outlooks .................................................................................................................................. 50
Demographic Forecast ..................................................................................................... 54
Demographic Outlook .............................................................................................................................. 54
Table: Australia's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Table: Australia's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Table: Australia's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Table: Australia's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Methodology ...................................................................................................................... 58
Industry Forecast Methodology ................................................................................................................ 58
Sector Specific Methodology .................................................................................................................... 59
Risk/Reward Ratings Methodology ............................................................................................................ 60
Sector Specific Methodology .................................................................................................................... 61
Table: Commercial Banking Risk/Reward Rating Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Weighting ............................................................................................................................................. 62
Table: Weighting Of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 5
BMI Industry View
Table: Commercial Banking Sector Indicators
Date
Total
assets
Client
loans
Bond
portfolio Other
Liabilities and
capital Capital
Client
deposits Other
November 2012, AUDbn 2,967.0 2,028.3 137.5 801.2 2,967.0 192.0 1,714.8 1,060.1
November 2013, AUDbn 3,188.5 2,123.8 165.0 899.7 3,188.5 203.0 1,864.9 1,120.6
% change y-o-y 7.5% 4.7% 20.1% 12.3% 7.5% 5.7% 8.7% 5.7%
November 2012, US$bn 3,093.7 2,114.9 143.4 835.4 3,093.7 200.2 1,788.0 1,105.4
November 2013, US$bn 2,904.1 1,934.3 150.3 819.5 2,904.1 184.9 1,698.5 1,020.6
% change y-o-y -6.1% -8.5% 4.9% -1.9% -6.1% -7.7% -5.0% -7.7%
Source: BMI; Central banks; Regulators
Table: Commercial Banking Sector Key Ratios, November 2013
Loan/deposit ratio Loan/asset ratio Loan/GDP ratio GDP Per Capita, US$ Deposits per capita, US$
113.88% 66.61% 136.7% 67,433.6 72,841.1
Rising Falling Rising n.a. n.a.
Source: BMI; Central banks; Regulators
Table: Annual Growth Rate Projections 2013-2018 (%)
Assets Loans Deposits
Annual Growth Rate 3 2 5
CAGR 3 1 5
Ranking 60 68 57
Source: BMI; Central banks; Regulators
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 7
Table: Ranking Out Of 71 Countries Reviewed In 2014
Loan/deposit ratio Loan/asset ratio Loan/GDP ratio
15 17 8
Local currency asset growth Local currency loan growth Local currency deposit growth
66 68 56
Source: BMI; Central banks; Regulators
Table: Commercial Banking Sector Indicators, 2011-2018
2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Total assets, AUDbn 2,821.8 2,964.7 3,083.3 3,083.3 3,268.3 3,366.3 3,467.3 3,571.3
Total assets, US$bn 2,880.7 3,081.5 2,867.5 2,528.3 2,549.3 2,524.7 2,600.5 2,678.5
Client loans, AUDbn 1,953.0 2,034.3 2,095.4 2,053.5 2,094.5 2,157.4 2,200.5 2,233.5
Client loans, US$bn 1,993.8 2,114.5 1,948.7 1,683.8 1,633.7 1,618.0 1,650.4 1,675.1
Client deposits, AUDbn 1,589.8 1,726.2 1,829.7 1,902.9 1,979.1 2,097.8 2,202.7 2,312.8
Client deposits, US$bn 1,623.0 1,794.2 1,701.7 1,560.4 1,543.7 1,573.3 1,652.0 1,734.6
e/f = estimate/forecast. Source: BMI; Central banks; Regulators
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 8
SWOT
Commercial Banking
Australia Commercial Banking SWOT
Strengths
Strong fiscal accounts and plans for a pre-funded bail-out fund limit will help impact
on wider economy in the event of a financial crisis.
Reserve Bank of Australia has put in place safety nets, such as the Committed
Liquidity Fund, to ensure sufficient liquidity in the financial system.
Weaknesses
Banks rely heavily on overseas borrowing.
Further deterioration in Chinese economy could put pressure on the Australian mining
sector.
Economic stability over recent years supports the current political system and radical
groups are unlikely to gain substantial support.
Weaknesses
As one of the region's largest and most stable states, the country attracts many
refugees and economic migrants. The issue is a key source of domestic tension and
has been hotly debated in parliament in recent times as the capsizing of a boat led to
the death of a number of refugees. The issue continues to be debated in the federal
parliament with no sign of political parties co-operating to find an alternative that
would ensure the safe passage and fair processing of the refugees, while reducing the
possibility of people smuggling.
The fragility of the state governments' finances compared to the large infrastructure
projects that they need to undertake has led to questions with regards to the
compatibility of the federal-state system with the country's current development
needs.
Opportunities
Australia has historically enjoyed close military ties with the US. However, with the
rise of regional economic powers such as China, it will need to balance competing
military and economic ties.
Threats
Australia's early support for the US 'War on Terror', among other things, has made
Australians abroad a target for Islamic extremists.
Australia's close alliance with the US, particularly under John Howard, has left a
lingering feeling among some Asian governments that it is America's 'deputy sheriff'
in the region.
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 10
Economic
SWOT Analysis
Strengths
A free-market economy supported by a highly educated workforce.
Blessed with rich natural resources, Australia's economic activity has been
augmented by demand for commodity exports and the investments made in the
mining sector.
Weaknesses
The persistent current account deficit increases vulnerability to capital flows and, by
extension, currency volatility.
A low level of government debt has provided a certain amount of flexibility in fiscal
policy to support domestic demand through the downturn.
Threats
The high level of private sector debt - especially mortgage loans - fuelled by overseas
funding poses a threat to sustained growth.
A collapse in exports from a drop in resource demand from China and other resource-
hungry countries would severely impact headline GDP growth.
Australia is vulnerable to extreme weather that may lead to droughts and floods,
which have become increasingly severe in past years as a result of global climate
change.
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 11
Business Environment
SWOT Analysis
Strengths
A highly educated workforce and comparatively modern transport infrastructure
underpin economic prospects.
A number of free trade agreements with countries such as New Zealand, Thailand and
the US serve as a boon for trading activities.
Weaknesses
Despite its openness, Australia requires the Foreign Investment Review Board to
approve any commercial real estate investment by a foreign company or individual
valued at US$5mn or more.
With a population of just over 22mn, the domestic consumer base is small by regional
standards.
Opportunities
Australia is currently in talks with China, Malaysia, the Gulf Co-operation Council,
Indonesia, India, Japan and South Korea regarding potential bilateral free trade
agreements. It is also part of negotiations for the Trans-Pacific Partnership and a
regional south pacific pact, PACER plus.
More healthcare infrastructure will be needed to support the ageing population, and
with the introduction of the federal government's National Disability Insurance
Scheme, the industry is likely to see increasing demand for services.
Threats
Corporate taxes for foreign investors in Australia remain higher than in other
countries, and it seems unlikely that the government will succeed to reduce the rates
in the near future.
Recent investment proposals by Chinese firms regarding the agricultural and resource
extraction sector have raised fears that strategic assets will be lost to foreign players.
This has led to more conditions attached to the sale agreements, which is likely to
Australia Commercial Banking Report Q2 2014
Business Monitor International Page 12
SWOT Analysis - Continued
reduce the attractiveness of these assets. It remains to be seen if the recent
implementation of a database to increase transparency around foreign-owned
Australian assets will spur more regulation.
Australia Commercial Banking Report Q2 2014
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Industry Forecast
BMI View: We believe that the trend of strong profit and dividend growth will not be sustained in 2014 as
the sector's outperformance has been underpinned by declines in non-performing loans and growth in
mortgage lending, both of which are unlikely to persist amidst a quickly softening job market. Together with
the growing risk of greater compliance costs from increasingly burdensome regulation, we believe that the
reprieve from future interest rate cuts delivered by the Reserve Bank of Australia (RBA) will only be
temporary. Hence, we maintain our bearish outlook for Australian banking equities, expecting them to
underperform the broader equity index.
We maintain our downbeat outlook for Australian banking equities despite the positive earnings growth
reported by three of the four major financial institutions for the quarter ending December 2013. So far, all
three banks have reported greater declines in non-performing loans as a key driver of the strong financial
performance. Going forward, however, we see factors such as rising loan losses driving up costs, while the
weakening economy weighs on revenues as demand for credit declines.
Softening Job Market Suggests Non-Performing Loans To Rise
Australia - Job Market Indicators (LHS), Wage & Residential Property Index (% chg y-o-y)
Source: BMI, ABS
Australia Commercial Banking Report Q2 2014
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Rising Loan Losses And Regulatory Burdens To Increase Costs
We believe that financial institutions are likely to see their cost increase, from both rising loan losses and
compliance costs. With joblessness on the rise and the pace of wage growth slowing to its lowest point since
the series begun in 1997, these indicators suggest that households' ability to repay may decline, making
further boosts to profits from lower loss provisioning for loans in 2014 unlikely.
Moreover, with greater regulation underway, we expect the costs relating to compliance to rise (for more
details see, 'Stability Concerns To Spur Regulation Drive', November 21 2013). Indeed, apart from the
Australian Prudential Regulatory Authority's keenness to implement liquidity reforms proposed under Basel
III framework (such as the Liquidity Coverage Ratio and Net Stable Funding Ratio which will raise the cost
of capital and funding for banks), the ruling coalition commissioned a sector-wide inquiry in December
2013. Within this inquiry, we believe that greater regulation is likely to emerge given the increasing
adoption of electronic payment systems and the use of virtual currencies (such as the Bitcoin). As such,
while the interest rate cuts that we forecast the Reserve Bank of Australia (RBA) to deliver could provide
some reprieve, we believe the boost will be temporary given the rising regulatory costs for the industry.
Highly Exposed To The Local Economy
Australia - % of Revenues From Australia For The Largest Four Banks
*Net revenues used due data limitations; Source: BMI, Various annual reports, Bloomberg
Australia Commercial Banking Report Q2 2014
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Domestic Economic Weakness To Weigh On Revenue Growth
At the same time, the sector's high level of exposure to the domestic economy and limited overseas assets
suggest very little upside potential for earnings growth in the coming year. This is clear from results for the
fiscal year 2012/13 (July-June), where three out of the four major banks reported more than 79% of their
revenues from Australia (note: only net revenue data was available for Australia and New Zealand
Banking Group). Thus, given our expectations for domestic economic activity to slow further in 2014, we
expect credit demand to weaken, which suggests limited growth on the revenue side of the ledger. Together
with mounting costs, we maintain our downbeat outlook for Australian banking equities, expecting them to
underperform the broader equity index.
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Industry Risk Reward Ratings
Developed States Commercial Banking Risk/Reward Ratings
Commercial Banking Risk/Reward Rating Methodology
Since Q108, we have described numerically the banking business environment for each of the countries
analysed by BMI. We do this through our Commercial Banking Industry Risk/Reward Rating (IRR), a
measure that ensures we capture the latest quantitative information available. It also ensures consistency
across all countries. Like all of BMI's Industry Risk/Reward Ratings, its takes into account the Rewards on
offer within the banking sector in a given country, but also the Risks to investors being able to realise those
opportunities. The overall Rating is weighted 70% towards Rewards and 30% towards Risks.
Within the Rewards category, we look at factors that are specific to the banking industry (accounting for
60% of the score within this category), and elements that relate to that country in general (accounting for
40% of the weighting). These include, but are not limited to, total assets, asset and loan growth, GDP and
taxation. Likewise on the Risks side, we look at industry-specific Risks (weighted 40% of the Risks total)
and country-specific Risks (weighted 60%). These include, but are not limited to, the regulatory framework
and environment, the competitive environment, financial risk, legal risk and policy continuity.
In general three aspects need to be borne in mind when interpreting the IRRs. The first is that the Industry
Rewards element is the most heavily weighted of the four elements, accounting for 42% (60% of 70%) of
the overall Rating. Second, if the Industry Rewards score is significantly higher than the Country Rewards
score, within the Rewards category, it usually implies that the banking sector is (very) large and/or
developed relative to the general wealth, stability and financial infrastructure in the country. Conversely, if
the industry score is significantly lower, it usually means that the banking sector is small and/or
underdeveloped relative to the general wealth, stability and financial infrastructure in the country. Third,
within the Risks category, the industry-specific elements (i.e. how regulations affect the development of the
sector, how regulations affect competition within it, and Moody's Investor Services' ratings for local
currency deposits) can be markedly different from BMI's long-term Country Risk rating for a given market.
Australia Commercial Banking Report Q2 2014
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Table: Developed States Commercial Banking Risk/Reward Ratings
Limits of Potential Returns Risks to Potential Returns Overall
Market Structure Country Structure Market Risks Country Risks Rating Ranking
Australia 46.7 85.0 93.3 78.0 68.6 28
Austria 56.7 75.0 86.7 80.0 69.6 25
Canada 80.0 85.0 100.0 80.0 83.8 4
France 86.7 82.5 93.3 74.0 84.0 3
Germany 80.0 82.5 93.3 80.0 82.3 8
Italy 76.7 72.5 93.3 70.0 76.3 13
Spain 73.3 77.5 86.7 68.0 75.1 15
Switzerland 73.3 95.0 96.7 82.0 83.8 5
UK 90.0 92.5 100.0 72.0 88.7 2
United States 93.3 85.0 100.0 82.0 89.8 1
Eurozone 93.3 77.5 66.7 48.0 77.5 11
Scores out of 100, with 100 the highest. Source: BMI
Australia Commercial Banking Report Q2 2014
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Market Overview
Developed States Commercial Banking Outlook
Table: Banks' Bond Portfolios, 2012
Bond Portfolio, US$bn Bond as % total assets Year-on-year growth %
Australia 145.0 4.7 29.3
Austria 40.3 3.3 9.6
Canada 230.1 5.9 -8.3
France 828.7 8.3 0.1
Germany 1,469.0 14.4 -2.9
Italy 674.9 13.0 22.0
Spain 795.7 18.1 7.7
Switzerland 151.5 4.9 8.2
UK 244.9 1.9 -6.5
United States 533.5 4.1 18.4
Eurozone 2,001.2 5.0 16.6
Source: Central banks, regulators, BMI
Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP Ratios, 2014
Loan/Deposit
ratio % Rank Trend
Loan/Asset
ratio % Rank Trend
Loan/GDP
ratio % Rank Trend
Australia 107.9 15 Falling 66.6 17 Falling 126.5 9 Falling
Austria 119.7 3 Falling 45.2 59 Rising 131.1 8 Falling
Canada 116.8 7 Falling 43.3 62 Falling 93.7 18 Falling
France 103.0 21 Falling 25.2 70 Falling 102.9 14 Rising
Germany 113.3 10 Falling 51.8 45 Rising 139.7 7 Falling
Italy 75.1 58 Falling 35.0 66 Falling 93.6 19 Falling
Spain 95.8 35 Rising 67.6 71 Rising 183.2 15 Rising
Switzerland 92.4 33 Falling 20.1 11 Rising 101.9 4 Rising
UK 87.4 41 Falling 67.4 12 Rising 295.0 1 Falling
United States 103.2 20 Rising 72.6 6 Rising 60.3 38 Rising
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Comparison of Loan/Deposit & Loan/Asset & Loan/GDP Ratios, 2014 - Continued
Loan/Deposit
ratio % Rank Trend
Loan/Asset
ratio % Rank Trend
Loan/GDP
ratio % Rank Trend
Eurozone 108.8 13 Rising 57.3 37 Rising 198.5 3 Rising
Source: Central banks, regulators, BMI
Table: Comparison of Total Assets & Client Loans & Client Deposits (US$bn)
2014 2013
Total Assets Client Loans Client Deposits Total Assets Client Loans Client Deposits
Australia 2,528.3 1,683.8 1,560.4 2,867.5 1,948.7 1,701.7
Austria 1,197.7 541.2 452.2 1,260.5 568.5 473.6
Canada 3,837.0 1,663.1 1,424.5 3,865.1 1,691.6 1,394.7
France 10,626.6 2,674.9 2,595.9 11,009.4 2,776.7 2,668.7
Germany 9,418.4 4,883.0 4,311.6 10,173.7 5,068.8 4,381.6
Italy 5,273.7 1,845.3 2,457.8 5,544.6 1,993.3 2,514.5
Spain 3,774.2 2,551.6 2,662.6 4,178.7 2,568.5 2,905.6
Switzerland 2,796.8 561.8 607.8 2,770.4 550.1 578.9
UK 11,918.2 8,032.2 9,193.7 11,978.1 7,921.3 9,022.3
United States 15,001.6 10,897.2 10,558.9 14,020.2 10,136.9 9,868.2
Eurozone 42,231.0 24,209.4 22,261.1 44,009.6 24,768.1 23,175.9
Source: Central banks, regulators, BMI
Table: Comparison of US$ Per Capita Deposits, 2014
GDP Per Capita
Client Deposits, per
capita
Rich 20% Client
Deposits, per capita
Poor 80% Client
Deposits, per capita
Australia 61,782 66,035 264,138 16,509
Austria 49,197 42,429 212,145 13,259
Canada 52,363 40,097 160,390 10,024
France 42,127 40,159 160,637 10,040
Germany 42,978 41,733 208,663 13,041
Italy 32,787 40,246 160,982 10,061
Spain 30,061 56,571 226,283 14,143
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Comparison of US$ Per Capita Deposits, 2014 - Continued
GDP Per Capita
Client Deposits, per
capita
Rich 20% Client
Deposits, per capita
Poor 80% Client
Deposits, per capita
Switzerland 67,106 74,507 298,029 18,627
UK 42,624 144,808 579,230 36,202
United States 56,067 32,732 130,930 8,183
Eurozone 37,018 66,511 266,045 16,628
Source: Central banks, regulators, BMI
Macroeconomic Forecasts
BMI View: Several domestic and external factors have served to boost the level of economic activity in
Australia. While we revised up our GDP growth forecasts for 2014 to 2.0% from 1.8% previously, this
change masks our concerns for the ever-growing risks within the Australian economy. Given that an
increasing proportion of capital is being invested in the housing sector despite the weak performance of
business spending, (a turnaround in which is required to generate wage growth), this misallocation of
capital increases the economy's vulnerability to external shocks, on top of the ongoing weakness in the
mining sector.
Since the September elections, the Australia economy has recorded an uptick in activity levels and business
sentiment from the lows recorded earlier in 2013, supported by both domestic and external factors.
Domestically, prospects of lower regulatory burden, ranging from taxes to various regulatory procedures,
have helped lift the outlook for certain industries, such as oil and gas. Moreover, September's readings of
the performance indices showed that deterioration in the services and construction sectors were moderating,
while activity in the manufacturing sector posted expansion in both September and October. The expansion
recorded in the new order sub-indices for the manufacturing and construction sectors further suggests that
this recent up-tick in activity could persist in the near term.
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Signs Of Life
Australia - Performance Of Manufacturing, Services And Construction Sector Indices
Source: BMI; Australian Industry Group
Externally, efforts by the Chinese authorities to stimulate their economy and the decision of the US Federal
Reserve to postpone any reduction to its ongoing unconventional monetary stimulus have helped lift key
commodity prices and import volumes, such as iron ore, from their earlier lows in June. Together with
domestic factors, these trends suggest that economic growth could hold up until Q214, and as such, we have
raised our 2014 forecast, expecting real GDP growth to come in at 2.0% versus our previous estimates of
1.8%. This upgrade, however, masks our downbeat medium-term outlook for the economy as risks of a
sharp deflationary shock to the Australian economy continue to grow larger.
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Households Driving Debt Demand
Australia - Total Private Sector Credit Growth (% chg y-o-y) & Growth Contribution From
Components (pp)
Source: BMI; Reserve Bank of Australia
Ongoing Misallocation Of Capital Increases Risks
As we have highlighted before, Australia's high level of external portfolio debt makes its currency very
vulnerable to external shocks. With much of this debt extended to the financial sector, the risks that a re-
pricing of the creditworthiness of banks or a similar liquidity squeeze as seen in 2008-09 could have a
significant impact on the Australian economy. Moreover, via the banks, much of this liquidity has continued
to flow into the housing sector, even as households owe roughly two-thirds of the total private sector debt in
the country that currently towers at 140.4% of GDP. In comparison, businesses have reined in their use of
credit despite the Reserve Bank of Australia's (RBA) easing its cash rate, cutting 50 basis points (bps) to
bring the cash rate to 2.50% as of end-October.
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Divergent Performance Unlikely To Persist
Australia - House Price Indices For Queensland, Sydney, Australia
Source: BMI; RP Data
Indeed, attribution analysis of the drivers of credit growth clearly shows the ongoing misallocation of
capital within the Australia, where ever more liquidity is headed to the housing sector, driving up property
prices. Although some observers have accredited the uneven house price growth in the different states to
differing underlying supply and demand dynamics in each area, we believe that these factors are unlikely to
hold up in the face of a weaker job market. We believe that demand for goods and services remain uncertain
at best, and see room for input prices such as wages to head lower. Growth from the mining sector is likely
to slow further as demand for resources tapers. As such, until businesses restart spending and hiring, we
believe the current uptick in activity will be limited, and hence, we maintain that the current trajectory of
house prices is built on shaky fundamentals and could correct should renewed worries of the economy come
to the fore and/or the financial sector find itself in another funding squeeze.
Increasing Pressures For Greater Macro-Prudential Rules
Given the disproportionate flows into the housing sector, we believe that there the RBA, in conjunction with
the banking regulator, the Australian Prudential Regulatory Authority (APRA), will find it increasingly
attractive to put in place macro-prudential rules and other limits to rein lending to the household sector.
Indeed, as banks were announcing their quarterly earnings result at the end of October, the APRA warned
the sector of handing out excessive dividends to shareholders, and further cautioned that it was looking at
implementing a higher capital charge on domestic systematically important banks (DSIB).
Australia Commercial Banking Report Q2 2014
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Private Consumption: The mining sector slowdown is expected to weigh on overall economic growth in
the country, which is likely to affect wage growth as well. Given that many businesses have adopted the
wait and see approach to hiring and spending, we believe that softness in the job market is likely to persist,
and weigh on household consumption. As such, we maintain our outlook for private consumption growth to
slow from 3.7% in 2012 to 1.5% and 1.3% in 2013 and 2014 respectively.
Private Investment: We have long implied a slow growth in investment as business credit has remained
slow, despite the aggressive rate cuts by the central bank this year, and cost cuts within industries like the
auto manufacturers suggest that investment could remain weak. The tapering off of iron ore and coal
investments will similarly weigh on fixed capital investment growth. That said, we have upgraded our
forecast 2014 slightly to better reflect the accelerating pace of construction for several gas terminals,
expecting fixed-capital formation to grow at 2.0% in 2014 versus 1.2% previously.
Public Consumption And Investment: The new coalition government remains keen on pushing through
its infrastructure and spending plans even though this is likely to raise the amount of public debt. While we
maintain our outlook for the government expenditure on goods and services (not infrastructure) to growth
by 2.0% in 2013 and 2014, we highlight that upside risks could increase in 2014 should the economy falter
once again.
Net Exports: While the stimulus in China helped lift its domestic steel industry and, correspondingly,
Australian iron ore exports from contractionary territory in the near term, we believe that the ongoing
rebalancing within the Chinese economy will lead to a gradual decline in demand for certain Australian
commodity exports. Moreover, ongoing construction of gas terminals in Australia is likely to put upward
pressure on import growth over 2014-2017. As such, we believe that the country's trade balance will see a
much more gradual improvement in 2014, and we forecast real export and import growth to rise to 4.5%
and 2.7% respectively, compared to estimates of 2.3% and 1.4% in 2013.
Australia Commercial Banking Report Q2 2014
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Table: Australia - Economic Activity
2008 2009 2010 2011e 2012e 2013f 2014f 2015f 2016f 2017f
Nominal GDP,
AUDbn 1,3
1,233 1,255 1,356 1,445 1,488 1,560 1,624 1,704 1,799 1,902
Nominal GDP, US
$bn 1,3
1031 980 1245 1491 1541 1536 1421 1363 1376 1427
Real GDP growth,
% change y-o-y
2,3
2.8 1.1 2.9 2.2 3.7 2.4 2 2.5 2.8 3
GDP per capita,
US$ 1,3
48,120 44,870 56,895 66,785 68,351 67,434 61,782 58,702 58,686 60,267
Population, mn 4 21.6 22 22.4 22.7 23.1 23.3 23.6 23.9 24.2 24.5
Industrial
production index,
% y-o-y, ave 3
2.3 -0.1 3.9 -0.6 3.6 2.5 1.2 1.6 2.1 2
Unemployment,
% of labour force,
eop 3
4.6 5.5 4.9 5.2 5.4 6 6.6 6.1 5.7 5.5
Notes:
e
BMI estimates.
f
BMI forecasts.
1
Calendar Years;
2
Calendar Years, Base Year = FY2008/09 (July-June).
Sources:
3
ABS/BMI calculation;
4
World Bank/UN/BMI.
Australia Commercial Banking Report Q2 2014
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Competitive Landscape
Market Structure
Protagonists
Table: Protagonists In Australia's Commercial Banking Sector
Central bank: Reserve Bank of Australia (RBA)
www.rba.gov.au
The RBA's main responsibility is monetary policy. Policy decisions are made by the Reserve Bank Board, with the aim of
achieving low and stable inflation over the medium term. Its other major roles are maintaining financial system stability
and promoting safety and efficiency in the payments system. The RBA is an active participant in financial markets,
manages Australia's foreign reserves, issues Australian currency and acts as banker to the government.
Principal banking regulator: Australian Prudential Regulation Authority (APRA)
www.apra.gov.au
APRA is the regulator of the Australian financial services industry. It oversees banks, credit unions, building societies,
general insurance and reinsurance companies, life insurance companies, mutual societies and most members of the
superannuation industry.
Banking trade association: Australian Bankers' Association (ABA)
www.bankers.asn.au
The ABA works with its members to provide analysis, advice and advocacy, and contributes to the development of
public policy on banking and other financial services. The association aims to ensure the banking system can deliver the
benefits of competition to Australian banking customers.
Definition Of The Commercial Banking Universe
The Australian Prudential Regulation Authority lists 21 Australian-owned banks, eight foreign subsidiary
banks, 41 branches of foreign banks, nine domestic building societies and 85 credit unions operating in the
country, as of December 2013.
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List Of Banks
Table: Major Banks
Australia and New Zealand Banking Group
Commonwealth Bank of Australia
National Australia Bank
Westpac Banking Corporation
Source: APRA, BMI
Table: Other Domestic Banks
AMP Bank
Bank of Queensland
Bendingo and Adelaide Bank
Community CPS Australia
Defence Bank
Heritage Bank
Macquarie Bank
MECU
Members Equity Bank
Police Bank
Police Financial Services (BankVic)
Police & Nurses (P&N Bank)
QT Mutual Bank
Rural Bank
Suncorp-Metway
Teachers Mutual Bank
Victoria Teachers Mutual Bank
Source: APRA, BMI
Australia Commercial Banking Report Q2 2014
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Company Profile
Bendigo and Adelaide Bank
SWOT Analysis
Strengths
Strong regional loyalty.
The bank has a sound credit quality, a balance sheet with a low level of risk and a
high quality capital base.
The bank has achieved some of the best customer satisfaction levels in the industry in
recent years.
Weaknesses
Higher cost of funding than larger rivals.
Significant costs involved in integrating Adelaide Bank, the weaker half of the merger.
Access to lower cost funding through government support during the crisis.
Access to lower cost funding through government support during the crisis.
Disposal of UK brands could provide a capital injection and exit from a sometimes
unstable market.
www.nabgroup.com.au
www.nab.com.au
Status:
Access to lower cost funding through government support during the crisis.
Strong footprint across Asia.
Weaknesses
Export-oriented business customers face challenging conditions.
Significant and growing presence in Asia Pacific markets outside Australia and New
Zealand.
Access to lower cost funding through government support during the crisis.
Still has the lowest reliance of Australia's leading lenders on offshore markets to fund
its lending.
Weaknesses
Loan growth is expected to remain slow as Australian economic growth is soft.
Opportunities
Expansion in existing markets in Asia Pacific.
Set to spend hundreds of millions of dollars on technology over the next five years.
Threats
Potential for increased regulation of banking sector.
Any new financial shock to regional economies in the global financial climate.
Company Overview
Australia and New Zealand Banking Group (ANZ) is one of the 'four pillars' of the
Australian banking system that dominate the market. At end-2013 ANZ had around
10mn customers in 33 countries and employs 47,500 people. It offers a full range of
banking services to individuals and corporations, with a focus on the Asia Pacific
region. Its aim is to become 'a super-regional bank in the next five years', using its
strong position in Australia and New Zealand to support further regional expansion, with
a goal of drawing 25-30% of profits from the region by 2017. As of September 2013,
84% of the group's profits still came from Australia and New Zealand.
ANZ Group operates in 33 countries across Australia, New Zealand, the Pacific, Europe,
Dubai, USA and Asia including its technology and operations centre in Bangalore, India.
ANZ shares and related securities are listed on the Australian and New Zealand
exchanges.
In 2013 ANZ Group was named Bank of the Year in Asia Pacific, Australia, Laos, and
Cambodia by The Banker magazine. It also received approval that year from The
Australia Commercial Banking Report Q2 2014
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People's Bank of China to act as market maker for direct trading of AUD-CNY on the
China Foreign Exchange Trading System, and has confirmed that it will open a new
branch in the Shanghai Free Trade Zone. This follows becoming the first Australian bank
to receive a renminbi retail license from China, in 2012.
Corporate
Highlights
For the fiscal year ending September 2013, ANZ posted profits attributable to
shareholders of AUD6.27bn, equivalent to a 10.8% y-o-y rise on 2012, and supported
by a 5% hike in net interest income, to AUD12.76bn. Total annual operating income,
meanwhile, lifted 4% to AUD18.44bn, while operating expenses fell by 3% to
AUD8.24bn.
ANZ Group's total assets rose by 9% to AUD703.0bn at end-FY13, from AUD642.1bn a
year earlier. Over the same period, net loans and advances increased by 10% to
AUD469.3bn, while deposits were up 11% to AUD439.7bn.
At end September 2013, the bank had a Core Tier 1 capital ratio, calculated to
international Basel III standards, of 10.4%, while the total capital adequacy ratio
remained stable at 12.2%. The bank has strong credit ratings from all the main
agencies: AA- (Standard & Poor's and Fitch) and Aa2 (Moody's), each with a stable
outlook.
Company Data
Website: www.anz.com
R
2
tests explanatory power; adjusted R
2
takes degree of freedom into account;
Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and
All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.
Australia Commercial Banking Report Q2 2014
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BMI uses the selected best model to perform forecasting.
It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry
forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot
structural breaks, anomalous data, turning points and seasonal features where a purely mechanical
forecasting process would not.
Sector Specific Methodology
BMI's Commercial Banking Report series is closely integrated with our analysis of country risk,
macroeconomic trends and financial markets. As such, the reports draw heavily on our extensive economic
data set, which includes up to 550 indicators per country, as well as our in depth view of each local market.
We collate our commercial banking databank from official sources (including central banks and regulators)
wherever possible, and only fall back on secondary sources where all attempts to secure primary data have
failed. Company data is sourced, in the first instance, from company reports, with central bank, regulator or
trade association data only used as a backup.
The reports focus on total assets, client loans and client deposits.
Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular
country. They do not incorporate the balance sheet of the central bank of the country in question.
Client loans are loans to non-bank clients. They include loans to public sector and state-owned
enterprises. However, they generally do not include loans to governments, government (or non-
government) bonds held or loans to central banks.
Client deposits are deposits from the non-bank public. They generally include deposits from public sector
and state-owned enterprises. However, they only include government deposits if these are significant.
We take into account capital items and bond portfolios. The former include shareholders funds, and
subordinated debt that may be counted as capital. The latter includes government and non-government
bonds.
In quantifying the collective balance sheets of a particular country, we assume that three equations hold
true:
Total liabilities and capital = capital items + client deposits + other liabilities.
In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and
three can be reconciled with equation one. In practice, other assets and other liabilities are analogous to
inter-bank transactions. In some cases, such transactions are generally with foreign banks.
Australia Commercial Banking Report Q2 2014
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In most countries for which we have compiled figures, building societies/thrifts are an insignificant part of
the banking landscape, and we do not include them in our figures. The US is the main exception to this.
In some cases, total assets and client loans include significant amounts that are owned or that have been lent
to customers in another country. In some cases, client deposits include significant amounts that have been
deposited by residents of another country. Such cross-border business is particularly important in major
financial centres such as Singapore and Hong Kong, the richer OECD countries and certain countries in
Central and Eastern Europe.
Risk/Reward Ratings Methodology
BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of
doing business and the industry-specific opportunities and limitations for potential investors in a given
market.
The RRR system divides into two distinct areas:
Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state
characteristics that may inhibit its development. This is further broken down into two sub categories:
Industry Rewards (this is an industry specific category taking into account current industry size and
growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall
score for potential returns for investors).
Country Rewards (this is a country specific category, and the score factors in favourable political and
economic conditions for the industry).
Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic
profile that call into question the likelihood of anticipated returns being realised over the assessed time
period. This is further broken down into two sub categories:
Industry Risks (this is an industry specific category whose score covers potential operational risks to
investors, regulatory issues inhibiting the industry, and the relative maturity of a market).
Industry Risks (this is a country specific category in which political and economic instability,
unfavourable legislation and a poor overall business environment are evaluated to provide an overall
score).
We take a weighted average, combining market and country risks, or market and country rewards. These
two results in turn provide an overall Risk/Reward Rating, which is used to create our regional ranking
system for the risks and rewards of involvement in a specific industry in a particular country.
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For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall
risk/reward rating a weighted average of the total score. Importantly, as most of the countries and territories
evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis. This
ensures that the rating draws on the latest information and data across our broad range of sources, and the
expertise of our analysts.
BMI's approach in assessing the risk/reward balance for infrastructure industry investors globally is
fourfold:
First, we identify factors (in terms of current industry/country trends and forecast industry/country
growth) that represent opportunities to would-be investors.
Second, we identify country and industry-specific traits that pose or could pose operational risks to
would-be investors.
Third, we attempt, where possible, to identify objective indicators that may serve as proxies for issues/
trends to avoid subjectivity.
Finally, we use BMI's proprietary Country Risk Ratings (CRR) in a nuanced manner to ensure that only
the aspects most relevant to the infrastructure industry are incorporated. Overall, the system offers an
industry-leading, comparative insight into the opportunities/risks for companies across the globe.
Sector Specific Methodology
In constructing these ratings, the following indicators have been used. Almost all indicators are objectively
based.
Table: Commercial Banking Risk/Reward Rating Indicators
Indicator Rationale
Banking Market Rewards
Estimated total assets, 2013 Indication of overall sector attractiveness. Large markets are considered more
attractive than small ones.
Estimated growth in total assets,
2013-2017
Indication of growth potential. The greater the likely absolute growth in total assets,
the higher the score.
Estimated growth in client loans,
2013-2017
Indication of the scope for expansion in profits through intermediation.
Country Rewards
GDP per capita A proxy for wealth. High-income states receive better scores than low-income
states.
Active population Those aged 16-64 in each state, as a % of total population. A high proportion
suggests that the market is comparatively more attractive.
Corporate tax A measure of the general fiscal drag on profits.
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Commercial Banking Risk/Reward Rating Indicators - Continued
Indicator Rationale
GDP volatility Standard deviation of growth over seven-year economic cycle. A proxy for
economic stability.
Risks
Banking Market risks
Regulatory framework and industry
development
Subjective evaluation of de facto/de jure regulations on overall development of the
banking sector.
Regulatory framework and
competitive environment
Subjective evaluation of the impact of the regulatory environment on the
competitive landscape.
Country Risks
Short-term financial risk Rating from CRR, evaluating currency volatility.
Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of
government policy.
Legal framework Rating from CRR, to denote strength of legal institutions in each state. Security of
investment can be a key risk in some emerging markets.
Bureaucracy Rating from CRR to denote ease of conducting business in the state.
Source: BMI
Weighting
Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal
weight. Consequently, the following weights have been adopted:
Table: Weighting Of Indicators
Component Weighting, %
Rewards 70, of which
Industry Rewards 60
Country Rewards 40
Risks 30, of which
Industry Risks 40
Country Risks 60
Source: BMI
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