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INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 9525
RUEHKO/AMEMBASSY TOKYO 3604
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RHEHAA/WHITE HOUSE WASHINGTON DC

UNCLAS SECTION 01 OF 02 CANBERRA 000625 
 
SENSITIVE 
SIPDIS 
 
C O R R E C T E D  C O P Y -ADD ADDEE- 
 
WHITE HOUSE FOR USTR, NSC and NEC 
Treasury for Dohner and Winship 
Department for EAP/ANP, EAP/EP and EEB/OMA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD AS
SUBJECT: CORRECTED COPY: AUSTRALIAN BANKS: Strong Grow Stronger 
 
REF: Canberra 345 
      Canberra 519 
      Canberra 575 
 
CANBERRA 00000625  001.4 OF 002 
 
 
¶1. (SBU) SUMMARY. Australia's major banks are emerging from the 
global financial crisis with increased dominance in domestic 
markets.  This is in part because non-bank lenders and smaller banks 
have been unable to secure securitized international funding, while 
government measures have favored leading banks - which are 
considered vital to fund the ongoing current account deficit and 
mounting levels of public debt.  The top four banks are protected by 
the Government's "four pillars" policy of opposing their 
consolidation or outside purchase.  However, international concerns 
over the sector's vulnerability are growing. END SUMMARY. 
 
BANKS IN CLOVER? - THE OUTLOOK FOR AUSSIE BANKS 
 
¶2. (SBU) Despite the economic downturn, the "Big Four" Australian 
banks (Commonwealth, Westpac, National Australia Bank (NAB) and 
Australia-New Zealand Bank (ANZ)) have increased market share and 
maintained high profit ratios while incurring low bad debts.  All 
four of Australia's major banks hold a coveted AA credit rating 
shared with only five other retail banks globally.  For the 2008 
reporting period, the return on equity for the largest Australian 
banks was 17% and at year-end held 82% of total banking assets.  The 
"big four" Australian banks are highly profitable and better 
positioned than their global peers, according to Moody's.  The 
Australian Prudential Regulatory Authority (APRA) recently reported 
major Australian banks had a profit margin of 30.6% in 2008 (it was 
12% for other domestic banks) according to. 
 
¶3. (U) The big four earned 80% of the A$46.5 billion Australian 
banks made from interest charged on loans last year.  In addition, 
fees and commissions (such as fees for late payments) came to A$21 
billion (70% to the big four).  The banks continue to build market 
share at the expense of non-banks and their smaller banking 
competitors - partly because their competitors have higher funding 
costs under the government guarantee. According to the Reserve Bank 
of Australia (RBA), the "big four" share of the mortgage market has 
risen to 92.5% from 79.7% in 2007.  Meanwhile, foreign bank assets 
fell to A$103 billion in March 2009 (down from A164 billion at 
end-2008) as a number of foreign lenders withdrew from Australia. 
Overall, the apparent strength of Australia's banking system has 
been applauded globally and used as a benchmark for regulatory 
reform. Treasury Deputy Secretary David Gruen has suggested that the 
four-pillar policy has contributed to financial stability" because 
it prevented takeovers between the major banks "thereby reducing 
their incentives to become more highly leveraged". 
 
GENEROUS GOVERNMENT POLICY MEASURES SUPPORT BIG BANKS 
 
¶4. (SBU) The Australian Government has energetically supported the 
banking sector, particularly through the Government  guarantee on 
bank deposits and on bank debt instituted in October 2008 
immediately after the collapse of Lehman Brothers.  Since November 
2008, all bank deposits up to A$1 million received a free government 
guarantee; while depositors with over A$1 million pay a fee for the 
Qguarantee; while depositors with over A$1 million pay a fee for the 
guarantee.  Similarly, banks can effectively borrow Australia's AAA 
sovereign rating to access lower cost funding on international money 
markets but must pay a fee based on their credit rating.  The double 
"A" rated majors must pay 0.7% above the market interest rate, while 
a single "A" rated bank like Suncorp pays 1% and the Bank of 
Queensland, with its "BBB" rating, pays 1.5%.So far in 2009, the big 
four banks have raised around A$120 billion (US$100 billion) in new 
funding using the guarantee.  Non-banking mortgage lenders are 
ineligible for the loan guarantee and a number have been absorbed 
into the banks. The smaller banks have therefore used the guarantee 
sparingly, although the major banks have raised more than $100 
billion in new short-term and long-term debt at a cost of more than 
$200 million in fees. The higher cost for secondary lenders has 
allowed the big banks to expand their market share. 
 
MOUNTING CONCERN OVER BANK FUNDING AND DEBT LEVELS 
 
¶5. (SBU) In late June, the IMF advised the Government to limit its 
borrowing in case it needs to bail out the major Australian banks, 
which must roll over short-term international debts which exceed 
A$500 billion (SEP TEL).  Similarly, Moody's ratings agency 
downgraded the entire bank sector because of rising bad debts and 
 
CANBERRA 00000625  002.4 OF 002 
 
 
falling consumer demand.  The agency shifted its outlook on the 
Australian banking sector from "stable" to "negative".  A key 
problem for bank funding is the low rate of savings in Australia 
(the average loan to deposit ratio for the Big Four is 153%, 
compared to 144% for UK banks and 110% for US banks) although the 
major banks hold 70% of total household savings.  NAB CEO Cameron 
Clyne said Australia's reliance on foreign capital flows "beyond its 
capacity to save" needed to be addressed. Further, many of our 
contacts believe that Australian banks are particularly vulnerable 
to a downturn in the commercial property sector due to the likely 
fall in property values. Macquarie Bank has forecast that the 
tier-one capital ratios of the majors will fall from 8-9% to 7% as a 
result of debt problems stemming from commercial property and rising 
unemployment. 
 
 
SINKING POPULARITY OF BANKS IN AUSTRALIA 
 
¶6. (SBU) Given the extent of government guarantees and other 
assistance for major banks, there has been escalating annoyance with 
recent small increases in interest rates, bank involvement in 
financial scandals and growing fees and charges.  The Commonwealth 
Bank's recent decision to raise its mortgage rates by 0.1% (on the 
grounds that it faced sharply higher costs), it was criticized by 
Prime Minister Rudd as a "selfish" action that undermined the 
federal government's support for the economy.  Most Australians fund 
their home purchases through adjustable rate mortgages, and small 
interest rate adjustment can have significant microeconomic impact. 
The RBA also published a report which suggested that bank margins 
were still robust - despite the banks' claims of higher funding 
costs.  Political support for the banks may be waning and in late 
June, Senator Steve Fielding introduced legislation to tighten 
controls on home loan interest rates in return for the deposit 
guarantee. The declining popularity of the banks could moderate 
government support for the sector. 
 
¶7. (SBU) COMMENT:  There are different perspectives on the dominance 
of the major Australian banks, but it is clear that the Rudd 
government has provided extensive support because of their critical 
role in financing Australia's current account deficit.  This has 
meant overlooking competition policy concerns and the imposition of 
unpopular bank charges.  Nevertheless, Australia's low level of 
savings (which has led banks to depend on overseas borrowing) 
remains an ongoing problem which creates a degree of sovereign risk 
if wholesale funding is less available, or costs increase. Our 
Government and market contacts are largely confident that the 
comparatively strong performance of Australia's banks as well as its 
overall economy makes the risks manageable, but the latest outside 
warnings are likely to be sobering. END COMMENT. 
 
CLUNE