Big banks' bottom lines getting benefit from low bad debt levels, but does this mean banks are over earning?

Big banks' bottom lines getting benefit from low bad debt levels, but does this mean banks are over earning?

By Gareth Vaughan

An area of analyst focus following a trading update and a half-year result from two of Australasia's four big banks this week is banks' low level of bad debts.

Jonathan Mott of UBS points out ANZ, which issued its first quarter trading update last Tuesday, has only had bad debt charges as low as now on three occasions since it began providing bad and doubtful debt data in 1980.

And in their report on ASB's parent Commonwealth Bank of Australia's half-year results, CLSA's Brian Johnson and Ed Henning say low loan losses mean the big Australasian banks are "over earning."

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In other words, we now have additional evidence of the growing vulnerability of Australia specifically. As we already pointed out in our musings about how “financial contagion” might spread from China in spite of its closed capital account, Australia is a pivotal region. Australia's economy greatly depends on China's commodity imports, and its banks have financed an enormous real estate bubble on the back of the commodities boom.
Moreover, Australia's banking system itself is highly dependent on foreign short term funding sources.Although the chart above doesn't tell us anything about the maturities of the claims on China, we would not be surprised if many or even most of the loans to China had much longer maturities than the foreign funding Australian banks get from (mainly) Europe. The main point is though that we have yet another source of potential trouble for Australia here – the exposure of Australian banks to China amounts to 9% of Australia's GDP at this point.

James Gruber's latest:
Scroll down to the chart of Australian Resources Construction - now 8% of GDP, compared to 2% in the Poseidon boom.

Great way to start a Monday.

The greed of Bankers.... 
Maybe they has special assurances from high above..????
Wonder what the chances are of an Aussie Bank collecting on a Bad Debt in China..???
Not exactly spreading their risk....   more like leveraging risk/profit...