As banks elsewhere have done, Australian banks have had to pay the price for lax lending policies during the credit boom of the 1980s.
Credit growth is now negligible, and system problem loans (nonaccrual and 90 days past due) have stabilized at about $21.75 billion. Respite this year will come from lower bad debts and tight control over operating overheads.
Nevertheless, banks face the prospect of funding nonaccrual loans for a number of years. A property market oversupply -- for example, the 15% vacancy rate in Sydney's central business district -- will not be eased by the weak economic recovery expected this year.
Banks are now in good shape to participate in the Australian economic recovery. They are well capitalized, earn strong net interest and other income, and will benefit from reduction in salary bills flowing from a downsizing of administrative areas.
Australia's major banks have embarked on a staff retrenchment exercise that will total more than 18,000 jobs in two years, or 10% of total employment. Once retrenchment payout costs are absorbed, bank profits will get a substantial boost.
The potential benefit for National Australia Bank is smaller because of its already impressive operating efficiency.
Apart from the attraction of the expected recovery in sector earnings, bank shares offer a high dividend yield, particularly relative to fixed interest rates.
The pain of bad debts and nonperforming loans has forced a healthy refocusing of management efforts on improving the returns of core businesses. The point of interest will be how this translates into stock market performance in coming years.
Mr. McIntosh is chief executive officer of McIntosh Hamson Hoare Govett.