Bank's head for a bleak year of bad debts and this will affect your mortgage

Commonwealth Bank of Australia Ltd first-half profit figures were better than expected, taking much of the suspense out of its results announcement this week.
Nevertheless, investors and analysts will be looking closely at the report on February 11 to see how much bad debts have increased because of the economic slowdown.
Mortgage lenders and home buyers want to know whether loan margins have suffered because of the higher funding costs, or grown because of the increased market power the Sydney-based bank has gained, as competitors went bust or got taken over.
The reality will be that relative to central bank interest rate movements, mortgage rates will be higher because the CBA and other major bank are unlikely to pass through any future interest rate cuts.
On February 2, Sydney-based CBA said first-half cash profit after tax was likely to be around $2 billion, 16 per cent lower than the year before, but more than 20 per cent higher than the consensus estimate.
CBA also said total operating income for the six months to December 31, 2008 would increase by 15 per cent to $8 billion, while operating costs had fallen about two per cent.
"It does look like the revenue is substantially higher than everyone expected, and the cost side looks pretty good too,'' Tyndall Investment Management portfolio manager Craig Young said.
Mr Young, who helps manage $4 billion in assets, including CBA shares, said the first thing to look for in CBA's result was how the bad debts were going.
"CBA is a little less provisioned than the other banks and it will be interesting to see if that's still an issue,'' he said.
The bank said on February 2 that impairment charges would rise to $1.6 billion, in line with market consensus.
"The loan losses are going to go up even more,'' Southern Cross Equities analyst TS Lim said. But Mr Lim said the problems with bad debts were likely to hit harder in the second half.
"Small businesses are going to get into strife,'' he said.
In December CBA increased its forecast for full-year impairment expense to gross loans and acceptances to 60 basis points, prompting Mr Lim to raise his estimate for the ratio to around 70 basis points.
The bank was criticised at the time for trying to alert prospective institutional investors to the updated impairment ratio without informing the market as a whole.
CBA said income growth was driven by a 20 per cent rise in banking income, as demand for deposits and lending remained strong.
The growth in banking income would be offset by the 12 per cent decline in funds management income, the bank said.
Tyndall's Mr Young said CBA had probably benefited from its increased market dominance, and that was likely to show through in improved margins.
The stronger market position "will come through in both the asset growth and margin,'' Mr Young said.
"It's very hard to see how much they're passing on to their business customers.''
CBA said statutory net profit after tax would rise about nine per cent to $2.5 billion, boosted by a post-tax gain of $550 million on the acquisition of BankWest, a key competitor the bank was able to take out of the market.
That may have offset higher wholesale funding costs, Mr Young said.

Reserve Bank of Australia flags end to mortgage rate cuts and forecasts slower growth

The Reserve Bank of Australia has flagged the likely end of big interest rate cuts, with some economists betting it may hold back on further reductions for several months.
And financial markets scaled back expectations today on the depth of future interest rate cuts after the RBA released its quarterly statement on monetary policy.
A Credit Suisse report said financial markets now priced a total of 50 basis points in further rate reductions over the next 12 months, down from 68 points yesterday.
Macquarie Bank interest rates strategist Rory Robertson said he expected the RBA to “sit on its hands” at the next two meetings while it assesses the impact of the past five rate cuts and the federal Government’s $42 billion stimulus package.
“After having delivered an appropriately aggressive response to the post-Lehman Brothers collapse in global growth prospects, the RBA now can make a respectable case to wait and watch for a while,” said Mr Robertson.
“It’s certainly possible that rates will go to 2 per cent, but it will take longer to get there than three months.”
The central bank earlier this week slashed rates by 100 basis points to a 45-year low of 3.25 per cent, taking total rate cuts to 400 points since September, when the collapse of Lehman Brothers froze global credit markets and smashed equity markets.
In its statement today, the RBA said significant fiscal and monetary stimulus was now pumping through the veins of the crisis-weary economy.
Investors interpreted the statement as signally a more cautious approach to future easings in monetary policy, sending three-year bond futures down 15 points to 96.69 by late afternoon.
Australia's Central Bank also sharply lowered its forecasts for economic growth in coming years, implying that the economy was still at risk of joining major countries in recession before starting to pick up in late 2009.
The RBA expects year-on-year growth of 0.25 per cent in 2008-09, before improving somewhat in 2009-10 with growth of 1.25 per cent. The economy grew by around 1.9 per cent in the third quarter of 2008 from a year earlier.
The non-farm economy will post zero year-on-year growth in the June quarter this year before recovering to expand by 1.25 per cent on year in the middle of 2010, the central bank forecast.
“While the international situation is likely to remain difficult for some time, the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the RBA said.
Mr Robertson said: “The bank has moved so far, so fast that its head is spinning and it’s time to sit back and assess the situation.
“The point of moving more gradually from here would be to ensure that the policy rate is properly calibrated to Australia’s economic prospects, not to the bleaker outlooks for the US, UK, Japanese and Euro-zone economies.”
NAB Capital senior economist David de Garis said he expected the RBA to cut rates by 75 basis points in March and then wait until the September quarter to cut rates by another 50 basis points.

There’s a time that central banks have to stand back and take a deep breath,

said Mr de Garis.
CommSec economist Savanth Sebastian said he expected the RBA to cut the cash rate by another 50-75 basis points over the next two months.
“More than likely the Reserve Bank will follow a similar pattern to that noted by the European Central Bank and keep rates on hold in March, assess all the incoming data before cutting rates once again in April,” said Mr Sebastian.
The RBA's growth forecast for the near term is slightly more pessimistic than the Rudd Government, which earlier this week forecast the economy would grow by 1.0 per cent in 2008-09, before slowing to 0.75 per cent in 2009-10.
The central bank forecast 2008-09 growth of just 0.75 per cent.
Late yesterday, Treasury Secretary Ken Henry, who is also a member of the RBA's policy making board, told a parliamentary committee that the Government's forecasts for economic growth were based on an assumption that rates will be cut further.
The impact of the intensified slowdown in the world economy in recent months and the economic stimulus being put in place would result in the downturn and recovery being more V-shaped, according to the RBA's latest forecasts.
Deeper troughs in growth will be followed by strong growth of 3.25 per cent on year by mid-2011. Previously the RBA had forecast the economy would be growing at 3.0 per cent by mid-2011.
Substantial stimulus has also flowed to the Australian economy in recent months as a result of a sharp decline in the Australian dollar.
The currency came close to parity with the US dollar in mid-2008, before plunging to just above US60 cents late last year and then recovering to around US65c currently. In trade weighted terms, the Australian dollar is 20 per cent below its level a year ago.
The RBA also revised its forecasts for inflation, predicting annual rises in the consumer price index would fall back to within the central bank's 2-to-3 per cent target band by mid-2009. Previously it had forecast the CPI would not be safely tucked within the band until mid-2011.
Despite expectations of an eventual growth recovery, the RBA expects the jobless rate will rise further. "With job vacancies and hiring intentions falling and short-term economic prospects subdued, more significant rises in unemployment are likely in the period ahead," the RBA said.
Some improvement in the house construction sector can be expected after a sharp downturn in 2008. Significantly lower interest rates and direct financial assistance for new home buyers by the government were now showing signs of adding to housing demand, it said.
Consumer confidence remained battered, but some recovery can be expected as the government spending measures and lower interest rates add "further to household incomes in the March and June quarters this year", the central bank said.
Also insulating Australia from the full heat of the global economic downturn was a strong financial sector, which has allowed a substantial amount of monetary policy easing to be passed through to consumers and more so than in many other countries, it said.
Still, the RBA is keeping close watch on business investment, warning investment intentions are being significantly wound back as some companies experience difficulty in obtaining credit.
Business confidence deteriorated sharply in October and November but this "has been partially reversed in December and January," the central bank said.
Against a backdrop of rising unemployment and weakening economic growth, the RBA would be under pressure to continue cutting interest rates for at least the next year or two, said Mr Robertson.

Business loan finance retreats

Business finance is shrinking which is a big concern to the RBA.
Figures collated by the Reserve Bank of Australia show the amount of credit outstanding to businesses and consumers fell 0.3per cent in December to just over $1.9trillion - the first monthly fall since 1992 - slowing what was expected to be a steady rise to $2trillion. Outstanding debt has roughly doubled in the past six years.
Corporations are leading the retreat, with demand for finance for new projects investment drying up and lenders become more cautious about who they lend to. Outstanding loans to business shrank 1.1 per cent in December, reducing the annual growth rate to 8 per cent, down from 24per cent the year before. The Reserve Bank said some of the decrease "reflected a fall in foreign currency-denominated lending".
Other figures released yesterday by the banking watchdog, the Australian Prudential Regulation Authority, and analysed by CommSec showed banks with foreign parent companies such as HSBC, Barclays and ING reduced loans and advances to both Australian firms and households in December. All of the big Australian banks, excluding NAB, increased theirs.
Credit Crunch to get worse
The chief economist at Morgan Stanley, Gerard Minack, said the figures showed the credit crunch was beginning to be felt domestically. "More to the point, it will likely get significantly worse. Reduced credit flows is part of the reason I expect a severe recession in Australia.
In particular, tight credit points to a major fall in business investment over the next 18 months."
The credit figures are another sign of a slowing economy, which as expected convinced the Reserve Bank to opt for a one percentage point interest rate cut yesterday.

Micro Loans help the destitute out of poverty

Microcredit programs are quite often targeted at poor women.
They talk of enterprise rather than charity; of helping the world's poorest trade their way out of poverty.
And for the microcredit movement, 2008 has marked an important milestone.
More than 106 million of the world's poorest received small loans to kick start their entrepreneurial dreams last year.
The basic concept behind microcredit is pretty straightforward.
The world's poor and hungry receive loans for small projects, perhaps buying a cow to sell the milk or setting up a fruit stall.
Most of the credit is targeted at women and peer pressure is a powerful incentive to repay.
In Kenya, Ingrid Munro founded and manages the Jamii Bora microcredit trust.
Ms Munro says the trust started with 50 beggars and "most of those beggars are now well above the poverty line".
"Some climb very fast when they take their first loan," she said.
"They start with as little as $20, and when they take that first loan they can now start a very small business, selling a few vegetables, selling charcoal, something like that.
Success story
Ms Munro is something of a star in the microcredit movement. In 10 years, her organisation has organised loans worth 2.8 billion Kenyan shillings ($53 million).
She says more than 98 per cent of the loans have been repaid on time.
Ms Munro tells of one customer Claris D'Ambo, who was a beggar for 15 years.
Nine years after receiving her first $20 loan, Ms D'Ambo owns a string of businesses that include a hair dressing salon and a herbal medicine shop.
She employs eight people and, importantly, all of her children go to school.
"Claris is proud and she's not poor anymore and she's convincing so many others that you can get out of poverty," Ms Munro said.
Ms Munro's successful project in Kenya is part of a surge in microcredit.
Ten years ago, 8 million people received micro loans. By last year that was 106 million.
And 88 million of the loans went to women. An ambitious target of 175 million loans has now been set.
Support
The movement's founder, Muhumad Yunus, was recognised for efforts to create social and economic development with the 2006 Nobel Peace Prize.
Some of the world's largest public and private lenders have backed the microcredit model.
Still, there is some disquiet about the boom in microcredit.
Some argue the most destitute have more immediate considerations like food and shelter and may end up borrowing from less scrupulous lenders to meet their microcredit obligation.
But it is not an argument Ingrid Munro has much sympathy for.
"You see you can't just go out and tell a beggar here's $50, get yourself out of poverty," she said.
"You have to start by talking to them, explaining to them, and making them see how others have done it and we use very much the ones who have been successful as the mentors of others."