Dragon Feeling The Heat

Sun Herald

Saturday May 17, 1997

By DAVID POTTS Business Editor

THE salad days for the banks are over, according to St George Bank managing director Jim Sweeney.

Warning that up to 80 St George branches will close by the end of the year - a larger-than-expected rationalisation from the merger with Advance Bank - Mr Sweeney said the banks were in a "classic margin squeeze".

His comments in an interview with The Sun-Herald suggested that on many home loans the banks are barely breaking even.

While the economic outlook was "pretty darned good", with small businesses showing signs of revival, Mr Sweeney said the banks would find the going tough because of non-bank lenders, or originators.

"We will all be originators of some sort," he predicted. St George will undertake its first securitised borrowing - packaging mortgages together and selling them in the money market like Aussie Home Loans and RAMS - later this year.

While the banks were facing intense interest rate pressure on home loans, they were also being squeezed by "mums and dads and those on fixed incomes because they are doing it tough".

Investors were demanding higher interest or, worse, were deserting the banks for other alternatives, Mr Sweeney said.

"We've got record home lending but a 25-year historic low margin.

"We're writing volumes we only dreamed about two or three years ago, but not at any profitable margin."

St George last week reported a 32 per cent jump in profit in the half-year to March 31 to $100 million and job cuts of 800, of which 100 had already occurred.

The National Australia Bank, Australia's most profitable company, chalked up a record interim profit of $1.1 billion but the rise of 14 per cent was below experts' expectations.

NAB also warned that lower home loan margins would make trading conditions difficult.

Westpac recorded a slower growth rate of 13pc to $638 million for the half-year.

For more than a year the coveted darlings of the sharemarket, bank shares, were hit hard on Friday as analysts cut profit expectations.

Mr Sweeney said mortgages were becoming a "sausage mince", with the funds going in one end and coming out as home loans at the other.

"The differences between banks and originators will blur in the middle, " he said. "Home loans are becoming commodity driven, where they used to be relationship driven."

Aussie Home Loans managing director John Symond has predicted the demise of the regional banks, but Mr Sweeney said St George - after its merger with fellow regional Advance Bank - was now a "super regional for want of a better word" and that it was aggressively chasing small business customers.

Mr Sweeney attacked originators for "bleating on about small business lending".

"It's all very well for originators and others to say there should be more competition for small business loans," Mr Sweeney said. "But I need an economic return on our capital for shareholders and I need to meet the Reserve Bank's requirements. They use masked housing loans to fund small business but they are still housing loans as far as I am concerned."

This meant the banks could not offer the cheapest small business loans, but St George would rely on relationship banking where it got to know the needs of customers and could, for example, advance extra money at short notice to tide them over a cash crisis.

Ironically, the branch structure, which banks have complained increases their costs making it harder for them to compete with originators, may yet save them.

An advantage for banks was that "we can rub shoulders with our customers" and for this reason phone banking was likely to fail to generate extra business, Mr Sweeney said.

"One thing that bothers me is that although most transactions are done outside the branch, every poll of customers we take overwhelmingly says leave my branch alone."

Even so, St George will be closing 50 branches by July and "probably another 30" by the end of the year because of duplication between it and Advance.

But he denied that ex-Advance branches were being singled out for the closure.

"The surviving trend has been St George's way because we had a larger customer base and therefore larger properties," Mr Sweeney said.

"In some cases where both banks had small branches we will keep both open until we find a bigger property."

The merger is now expected to generate extra savings of $35 million a year, making $175 million a year, but Mr Sweeney would not be drawn on whether the additional savings would improve returns to shareholders, which have been diluted by the merger.

"Unquestionably shareholders, who got behind the merger, have an expectation," he said. "All I can say is that we will work through the dilution and get on an upward trend."

He conceded the merger had reached the harder stage and that "yes, I am concerned about it".

Information technology would now dictate the pace of change, he said.