Higher funding costs and weaker margins have prompted the market to call the end of the big banks’ post financial-crisis earnings spurt and to expect lower fiscal 2010 profits.

But not all players agree the good times are coming to an end for the big four – ANZ, Commonwealth Bank, National Australia Bank, and Westpac.

Six months after Westpac’s controversial 45 basis point interest rate hike to loans, political pressure regarding rates is likely to prevent the banks from passing on higher funding costs to borrowers ahead of the federal election.

The risk of a margin and earnings crunch is higher than in December courtesy of higher wholesale term funding costs driven by Europe’s debt crisis and slowing deposit growth, despite the decline in bad debt charges.

“Banks ability to pass these (pressures) through to borrowers has been inhibited by substantial political pressure, especially in mortgages, with the banks effectively prohibited from repricing pre-election,” UBS analyst Jonathan Mott said.

Fat Prophets’ chief executive Angus Geddes said the debt crisis had put upward pressure on interest rates, which would eventually be passed on to Australian consumers.

“You’ve also got the dual headwind of the housing market actually slowing down,” he said.

“We don’t think that housing prices in Australia are going to crash, but we do think that credit growth is going to slow.”

Worries over an earnings crunch prompted analysts to downgrade bank stocks last week.

These followed downgrades from six brokers in May after a lacklustre first half earnings season with lower margins and weak outlook statements.

UBS cut its fiscal 2010 earnings estimate by one per cent for the big four as net interest margins (NIM) fall.

Credit Suisse agrees margins have peaked and CLSA Asia Pacific says inflated earnings have had their day.

Europe’s sovereign debt crisis has driven wholesale term funding costs higher, making it more expensive for the big four to refinance $78 billion due in the next 12 months.

Tougher regulatory capital and liquidity requirements from 2011 will also make refinancing more expensive and banks will pass this cost on to borrowers, CLSA told clients in May.

Commonwealth Bank customers may be first, with chief executive Ralph Norris saying in May the bank still has one-quarter of its loan book to re-price.

ANZ customers may be next, with the bank telling UK investors on Monday that the cost of rolling over term debt had risen by 20 per cent.

Funding costs would rise, said ANZ, which must re-price 25 per cent of its $90 billion term debt portfolio.

Mr Geddes helps manage $45 million at Fat Prophets and re-weighted funds away from CBA and Westpac to “aggressively” favour ANZ for its access to Asian deposits, which he says will give the bank a competitive advantage on wholesale funding.

“We’d rather be in a bank that’s exposed to a high growth region than a CBA or Westpac which are more pure Australian plays,” Mr Geddes said.

Most analysts share his sentiment and point to ANZ’s cheap share price, access to $5 billion of Asia-based deposits, and bond and loan syndication deals in Asia.

But Platypus Asset Management’s chief investment officer, Donald Williams, says ANZ has just 12 months to prove it can grow its Asian assets organically, otherwise the reason for owning the stock will evaporate.

Mr Williams, and Southern Cross Equities analyst TS Lim, say the market’s bearish earnings outlook is misplaced.

Loan losses were falling, so bank margins would recover and somewhat offset higher funding costs, Mr Lim said.

Funding cost risk was difficult to call and “not a deal breaker” for the banks’ earnings outlook which was better than non-bank industrials, Mr Williams said.

Mr Williams manages $1.8 billion in client funds, and expects credit growth to accelerate as consumer and business confidence strengthens over the next six months.

“We think decent earnings growth is underwritten for at least the next two halves with the improvement in the bad debts side,” he said.

ANZ is Platypus’ smallest local bank holding.

The fund manager has no National Australia Bank (NAB) stock, and Mr Lim recommends reducing NAB holdings because of “too many uncertainties”.

Most market players say NAB is now “in a class of its own”, accident prone and still high risk.

Once the country’s biggest lender, NAB is now counting on its business banking franchise to underpin earnings as it struggles to make its price-led “more give, less take” retail banking campaign pay off.

“What is interesting is that NAB has broken ranks with the cartel (over fees),” Mr Geddes said, adding that Australians pay the highest bank fees in the world.

NAB’s fee cuts were followed by its rivals in 2009, but these were not enough to prevent more than 112,000 claimants joining a $5 billion class action against 12 banks over fees.

Analysts predict it will not dent banks’ earnings.

AAP