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Lending surge and fewer bad debts to boost big banks    
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By: Scott Murdoch; Business with the Wall Street Journal, Malaysia

THE major Australian banks will boost their earnings this year through a forecast business lending surge and a drop in bad debt.

Reports by investment banks Morgan Stanley and Nomura show the top four retail banks are well positioned to cover a likely earnings shortfall caused by a slowdown in residential mortgage lending expected over the next two years.

Morgan Stanley analyst Richard Wiles has predicted business lending will pick up by 3.5 per cent over the next three quarters, driven by an increase in lending by the construction, wholesale, retail and transport sectors.

Demand for credit is expected to be boosted by the Queensland floods, with rebuilding in the state's southeast corner forecast to cost up to $20 billion.

The Morgan Stanley report shows National Australia Bank, fourth-largest by market capitalisation, but with the largest business lending book, is best positioned to benefit from the likely improvement.

It forecasts NAB will grow its business loans by 7 per cent this year, compared with 5 per cent at ANZ, 3 per cent at Westpac and 2 per cent at Commonwealth.

Mr Wiles said Commonwealth would experience the least improvement because most of its business lending was to small and medium enterprises.

"Business loan growth is going to be a key share price driver," Mr Wiles said. "Revenue growth is going to face stiff headwinds in 2011. Business loan growth is going to be a key factor.

"The most recent trends in loan approvals are consistent with positive loan growth in 2011."

The Morgan Stanley analysis shows the finance industry accounted for nearly 20 per cent of business loans, compared with retail and transport at 14 per cent and agriculture at 9 per cent.

Mr Wiles said business surveys showed that NAB should benefit the most of the top four banks because its business lending was diversified.

Of the remaining top three, ANZ had greater resource and mining industry exposure, Westpac was a major lender to the corporate sector, while Commonwealth was focused on small-business lending.

"The improvement in loan growth in the past 12 months has been driven by larger firms, while the trend in the micro segment moved in the opposite direction," Mr Wiles said.

In a separate report on the Australian banks, Nomura shows a marked reduction in bad and doubtful debts this year should boost earnings for the top four.

It estimates that earnings per share this year could rise by up to 7 per cent, and next year by 1 per cent, because of lower bad-debt charges.

Nomura's Victor German said the banks had sufficient provision during the previous business cycle, helping to cushion the blow from bad debts during the global financial crisis.

"Our loan loss forecasts appear consistent with our economic growth and unemployment expectations," Mr German said.

"Bad debts for banks typically peak 12 months after the low point in GDP growth, and tend to peak when unemployment peaks.

"The banks were conservative and proactive during the recent cycle, so bad and doubtful debt charges peaked earlier."

Mr German said the banks' margins were unlikely to improve sharply, given the intense political and regulatory focus on the sector.

The major Australian banks were heavily criticised in November last year for raising their standard variable rates by more than the Reserve Bank's official moves. The high cost of retail deposits is also expected to weigh on the banks' cost base.

"Given the current political and regulatory landscape, coupled with the funding issue, we do not expect margins to improve from current levels," Mr German said. "Mortgage costs are increasingly becoming a key focus for the government. We believe banks will find it difficult to continue increasing spreads in the current political environment.

"Business spreads appear to have peaked and are likely to start trending downwards as banks reprice loans that were written at unprecedentedly high levels during the crisis."

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