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banksThe warning by Standard & Poor’s on Friday that it could downgrade the credit ratings of banks with exposure to the Queensland floods shows that the floods will continue to wreak havoc on business for a long time yet.

Share prices of Suncorp and Bank of Queensland fell after the Standard & Poor’s warning, and in the past few weeks companies including Virgin Blue, Woolworths, Macarthur Coal, QR National and Energy Resources Australia have issued profit warnings partly linked to the floods.

But this is just the beginning of profit downgrades as banks, insurance companies, mining companies and retail groups start to tally the direct and indirect impact of the floods and other tough market conditions.

And the decision by the Prime Minister, Julia Gillard, to impose a flood levy will not help consumer confidence. Another levy on top of the imminent mining tax and carbon tax makes people nervous about government policy, and that puts more pressure on discretionary spending at a time when retailers and small businesses can ill afford it. The Gillard spin is that the levy will cost most people less than $1 a week, but the perception is otherwise, and it it is that that drives consumer sentiment.

Australians have curbed their spending since the global financial crisis, but a pile of worries continues to drive down consumer confidence: rising interest rates and fears of more to come if inflation takes off; rising food prices caused by food shortages; rising power bills; higher petrol prices; higher education and health bills; and an impending carbon tax.

The most recent Westpac survey shows consumer confidence fell 13 per cent in the past year. The knock-on effect of weak consumer confidence is weaker retail sales, which has a profound impact across the supply chain. This is already playing out.

In the meantime, the impact of the floods on banks and insurance companies will remain a key focus of credit ratings agencies and investors in the coming profit season.

The Standard & Poor’s warning that it cannot rule out a move to negative ratings in banking will put a blowtorch on the Bank of Queensland and Suncorp. Both arguably have the biggest number of loan customers affected by the floods.

Even before the floods there were concerns that the values of at least 30 per cent of Gold Coast properties were lower than that of their mortgages. House prices are flat, and the property group Mirvac announced last Wednesday that it had made a $215 million provision on zero-margin projects and unsold stock in poorly performing regional markets. Put all that together and you have to wonder whether banks are providing full disclosure of “Gold Coast to Noosa” properties, especially holiday homes.

This, as well as funding issues and asset quality, have prompted the banking analyst Brett Le Mesurier at BBY to suggest that a merger of the banking businesses of Suncorp and the Bank of Queensland is a good option. He estimates that such a tie-up could produce $800 million in value for the two listed entities.

He says the deal could be structured through a share swap, Suncorp selling its bank to the Bank of Queensland in return for a 52 per cent stake in the merged Bank of Queensland entity.

The Bank of Queensland and Suncorp have asset quality issues that include commercial real estate exposures. Much of Suncorp’s are in the public arena, and the Bank of Queensland’s are coming to light. On December 8 it was forced into a profit downgrade after suffering a $97 million increase in the value of troubled property assets amid a slump in the state’s commercial real estate market, implying that its impaired commercial assets had doubled in less than two months.

Profits for the 2011 financial year are forecast to be between $210 million and $230 million, compared with a previous projection of $220 million to $250 million.

The bank said it would increase bad debt provisions to cover for any losses from falling property prices to as much as $90 million in the first half of the 2011 financial year, significantly higher than its previous forecast of $53 million.

The downgrade came after a three-week review of the bank’s top 250 property exposures confirmed the sector was performing much worse than expected. Queensland’s commercial real estate market was singled out as the main offender, with an acknowledgment that it had suffered impairments to the value of two of its retail shopping centre exposures in the state. It declined to name which ones. It denied that exposure to the struggling high-rise residential property market on the Gold Coast had a role in the downgrade.

Then on Friday it published the prudential disclosure report for November 30, the APS 330, which, Le Mesurier says, shows that not only has the asset quality of its commercial loan exposures deteriorated but so has its residential loans.

If Suncorp and the Bank of Queensland decide to join forces it may be a marriage made in heaven or possibly hell.

Adele Ferguson

Story by Adele Ferguson www.smh.com.au

Tags: banks, disaster, economy, finance, flood, housing, money

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