Banks too aggressive on accounting

The banking sector represents about one-fifth of the sharemarket so the fate of the banks is critical to the direction of Australian shares. A report by Credit Suisse maintains that since 2010 major banks have adopted increasingly aggressive accounting tactics, which benefited cash earnings by 10 per cent in the second half of 2010-11 and 8 per cent in first half of 2011-2012.

“We see Commonwealth Bank of Australia (CBA) as having been relatively less aggressive in its accounting treatment among the major banks,” the report says. “The Australian and New Zealand Banking Group (ANZ) is marginally the most aggressive (with the) largest quantum usage of significant item restructuring charges, the most aggressive capitalisation of expenses, but only modest dilution of loan loss provision coverage.”

Credit Suisse says the quality of bank earnings is “fraying at the edges” because of IT expenses, restructuring charges and softening collective provision coverage ratios. It has an “outperform” rating on Westpac Banking Corp, a “neutral” recommendation on ANZ and National Australia Bank and an “underperform” rating on CBA.

Meanwhile, a report by Macquarie Equities notes danger signs in property values, both commercial and retail.

“Arguably, as credit growth continues to soften, further pressure will be placed on asset values,” the Macquarie report says. It goes on to say that “book value for assets may be materially different to current values”.

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