Australian Bank Earnings Tell Tale of Two Economies

Three of Australia's big four banks have given market updates this month. You'd be forgiven for wondering if they were discussing the same market.

The chief executive of the largest by market value, Commonwealth Bank of Australia (CBA.AU), struck an upbeat tone on Wednesday when the lender reported consensus-beating earnings in its fiscal first half.

It cited a year-long spate of interest-rate cuts by the central bank that had helped warm the economy, helping net profit to climb 1% to 3.66 billion Australian dollars (US$3.79 billion) and cash profit, which omits one-off-items, to rise 6% to A$3.78 billion.

As the country's largest retail lender, Commonwealth Bank is something of a bellwether for Australia's economic health.

The bank's cheerful tone, both in the results and outlook statement, chimed with the central bank's own view that the resource-rich economy, weighed down last year by slowing demand from China, was gradually turning the corner.

Chief Executive Ian Narev's remark that the rate cuts had injected "a bit more optimism" into the economy were greeted with enthusiasm by the market. CBA's shares closed up 2.4% on Wednesday after hitting a record high of A$67.38, the same day a non-government survey showed consumer confidence rising to its highest level in more than two years.

"If the current stability continues, we believe it will translate into a slow but steady rebuilding of consumer and business confidence in Australia," Mr. Narev said. "That is our base case for the 2013 calendar year."

Australia & New Zealand Banking Group Ltd. (ANZ.AU), which reported quarterly results on Friday, painted a different picture. Its Chief Executive, Mike Smith, dubbed the Australian economy "soft" and insisted consumer and business confidence was "weak," as the lender reported a 20% drop in quarterly net profit.

While ANZ's cash profit climbed 6.2% to A$1.53 billion in the final three months of 2012, its shares fell as much as 1.6% on Friday, partly due to its more conservative outlook, adding to concern it was failing to squeeze as much profit as rivals from its loans.

National Australia Bank Ltd. (NAB.AU), which released a quarterly update the previous week, tilted closer to ANZ's story on the economy. Its boss, Cameron Clyne, who has been dealing with weakness both in Australia and the U.K.--where NAB owns two banks--described economic conditions on the domestic front as "challenging," even as it reported consensus-beating first-quarter results.

The discrepancy in viewpoints is partly explained by the different business models of the three banks. Commonwealth Bank is the country's biggest retail lender, which means it benefits most from rising consumer confidence.

NAB and ANZ are both more exposed to business lending, where sentiment is weaker. A survey from East & Partners, for instance, last week found that demand for all types of business banking services fell between November and January by an average of 1.9%.

As Nomura analyst Victor German put it: "Retail banking is the place to be right now."

Despite their differing outlooks, investors overall still seem to like Australia's banks, deemed to be among the most credit worthy in the world.

Paul Xiradis, Chief Executive of A$11 billion fund manager Ausbil Dexia, is one investor who plans staying overweight the banking sector after the updates.

Despite their grimmer outlook, Mr. Xiradis reckons shares in ANZ and NAB are the most undervalued and will outperform the bigger retail banks later in the year as economic conditions improve.

"The fundamentals for the overall banking system are still quite strong," he said.

The last of Australia's big four lender, Westpac Banking Corp., is due a half-year update in May.

Write to Caroline Henshaw at [e-mail]

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