Lower Aussie dollar boost for banks

Offshore earnings to boost bank profits

a woman

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The big four banks are expected to receive a boost to their profits on the back of the falling Australian dollar.

ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) are expected to see hundreds of millions of dollars flow into their coffers in the next financial year, as their offshore earnings are translated back in Aussie dollars.

ANZ Bank is expected to be the major beneficiary with its Asian operations providing a decent share of earnings, but the other majors also have substantial offshore businesses. ANZ has stated that it wants to become a super-regional bank, and has made the biggest push into Asia ahead of its competitors. According to UBS analysts, ANZ generates 18% of earnings in new Zealand dollars and a further 17% in US and Asian currencies.

While the banks use hedging to protect themselves from adverse currency movements, the hedging can also limit their upside earnings as the dollar falls. Still, analysts expect the falling Aussie to provide benefits in the years ahead.

Despite concerns over global economic growth, especially in the US, Europe and China, Australia’s big four banks are expected to report total profits of more than $27 billion in the 2013 financial year. That may seem an extraordinary amount, but it is a return of just 1.2% on their total assets.

That still makes the big four amongst the most profitable banks in the world according to a report released last week by the Bank for International Settlements. Even banks in the US, Canada, United Kingdom, Sweden and Germany are less profitable that the big four. However, some banks in developing countries where governments have tight control, have higher profit levels.

Foolish takeaway

The falling Australian dollar is generally good for the Australian economy and our companies. For the banks, the boost will offset some of their low credit growth, but at current prices they still appear expensive, although more attractive than they were a month or so ago.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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