Banking : Working the Numbers - Who Will Pass the Test? That's the $64,000 Question as Our Major Banks Attempt to Confront the Ongoing Effects of a Contracting Global Economy and the Bite of an International Credit Crunch

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Byline: Mark Peart

Business advisory firm KPMG summed up the issues facing banks in its annual analysis of banking sector performance earlier this year: "The global credit crunch, slowing asset growth, and an increase in doubtful debts all underscore the sharp turnaround in the banks' underlying agenda from asset-led growth to a more conservative (of necessity) process of balance sheet management."

Couple this with the demands key commercial and corporate clients put on their relationship and account managers to provide a ready source of capital for business development and in some cases, short to medium-term survival, and there is no doubt this is no climate for the faint-hearted.

As has been well documented in the mainstream media, the wariness of investors towards financial institutions with potential sub-prime exposures has led to the 'credit crunch' with the result that many financial institutions cannot source medium- to long-term funding or can only do so at much higher interest rates.

Credit spreads steadily increased during the first three months of 2008. Even banks rated 'AA' were required to pay credit spreads of approximately 90 basis points (over the interbank swap rate) for three-year funds during March 2008.

KPMG says the core risks omnipresent in banking - credit, market, and liquidity risk - all require strong management experience and capability. These skills are certainly prized commodities in one of the more challenging economic environments in years.

Ross Verry, general manager of corporate banking for ANZ National Bank, is only too aware of this.

"We are a relationship business. When the business climate is benign, relationships are easy, but when times are challenging, that's when business and banking relationships really show their worth."

Verry agrees that for his bank's corporate customers, availability and certainty of funding and risk management solutions are critical.

"We are making sure we are in a position to meet the needs of our customers."

He says the Australasian banking system is doing better than almost all other western financial systems as the major banks are profitable and well-capitalised.

He points out that ANZ is amongst the top 50 banks in the world by market capitalisation and one of just 18 double-A rated banks in the world.

Nevertheless, there is no doubt the ripple effects of global events are being felt here, and tightening liquidity is the major factor for businesses and for their banks.

"The market turmoil means that the cost of credit has increased and banks are paying more for their funding which means that borrowers will too," Verry says.

The good news is businesses are still seeing growth, acquisition, and successful opportunities despite the contraction in the world economy, especially in Asia.

Tempering this is an undeniable decline in business confidence and an easing in the ambition of many business expansion plans.

A characteristic of New Zealand business is the degree of fragmentation within some industries, says Verry.

"This economic cycle lends itself to consolidation and we expect to see more of that kind of acquisitional transaction."

Verry says other customers are responding to the environment by looking for opportunities to maximise returns in their cashflow management.

"For example, we have recently worked with an exporting company that has put in place a funding line with us based on the creditworthiness of its overseas customer. In volatile times it's more important than ever that bankers and their clients communicate regularly."

Coming back to that $64,000 question, KPMG says short term, banking sector results are unlikely to be materially affected. Longer term, the acid test will be: how prepared are banks to adjust their strategies to the flow-on effect of changing market dynamics? …