Westpac’s credit demand flat-lining
(10 June 2011 – Australia) One of Westpac’s biggest businesses, the institutional bank is struggling with flat-lining credit demand and growing competition which could lead to pressure on future profits.
A new report from broker Morgan Stanley has forecasted that Westpac’s institutional banking earnings were likely to fall at least 4 percent this year and 3 percent next year, ending its run as the overall bank's best performing business.
The institutional business which lends primarily to big business and corporate, makes up 25 percent of Westpac's earnings, meaning the forecast reductions will flow through to the bank's bottom line.
The institutional bank's loan portfolio is estimated to have contracted by almost 20 percent from A$83.9 billion to A$64.2 billion since the peak of 2008. The estimated earnings slowdown could cost Westpac up to 2 percent of its profits over the next two years.
Westpac, since its integration with St George, has become more conservative in its business lending, with chief executive Gail Kelly focusing aggressively on residential mortgage lending.
"These are concerning forecasts, as all East & Partners’ numbers show rapidly accelerating demand for borrowings coming from Australia’s Institutional (Top 500) market", commented East’s Principal Analyst, Paul Dowling.
"Having deleveraged and used offshore capital markets for any debt funding over the past two and a half years, these institutional customers are back in growth mode, are looking to debt fund this growth and increasingly plan to do so by vanilla bank lending – a stark contrast to the flat/declining demand for lending across the rest of the business markets in Australia", Mr Dowling added.
Each of the major banks have been hit by the rapid slowdown in business credit demand over the past 18 months.
Morgan Stanley forecast that demand will bounce back by up to 6.5 percent a year and the banks are hoping the surge will cover the shortfall that emerged with residential lending facing renewed pressure.
The institutional business which lends primarily to big business and corporate, makes up 25 percent of Westpac's earnings, meaning the forecast reductions will flow through to the bank's bottom line.
The institutional bank's loan portfolio is estimated to have contracted by almost 20 percent from A$83.9 billion to A$64.2 billion since the peak of 2008. The estimated earnings slowdown could cost Westpac up to 2 percent of its profits over the next two years.
Westpac, since its integration with St George, has become more conservative in its business lending, with chief executive Gail Kelly focusing aggressively on residential mortgage lending.
"These are concerning forecasts, as all East & Partners’ numbers show rapidly accelerating demand for borrowings coming from Australia’s Institutional (Top 500) market", commented East’s Principal Analyst, Paul Dowling.
"Having deleveraged and used offshore capital markets for any debt funding over the past two and a half years, these institutional customers are back in growth mode, are looking to debt fund this growth and increasingly plan to do so by vanilla bank lending – a stark contrast to the flat/declining demand for lending across the rest of the business markets in Australia", Mr Dowling added.
Each of the major banks have been hit by the rapid slowdown in business credit demand over the past 18 months.
Morgan Stanley forecast that demand will bounce back by up to 6.5 percent a year and the banks are hoping the surge will cover the shortfall that emerged with residential lending facing renewed pressure.
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