Interest margin 'key for regional banks'

Shrinking interest margins and minimising bad debts are the key challenges facing regional banks in fiscal 2009 as they compete against the increasing dominance of Australia's major banks according to KPMG.

A survey of the regional banking sector by the global consulting firm highlighted that regional players had suffered an average interest margin contraction of 10 basis points during fiscal 2008.

Regional banks' bad debts exposure also jumped 64 per cent, albeit off a very low base, KPMG said in a statement.

But the sector's before-tax operating profit performance increased 4.8 per cent to $3.0 billion during fiscal 2008, in stark contrast to the major banks' 24.6 per cent profit plunge.

Going forward, fiscal 2009 will see constant pressure on interest margins and likely increases in bad debt expenses, KPMG partner Martin McGrath.

"The regionals' margins continue to be well below those of the majors and this is unlikely to change given the difficulties in funding markets," he said.

This is the third KPMG survey in as many weeks on the financial services sector, and included information on St George Bank, Suncorp-Metway, Bendigo and Adelaide Bank, Bank of Queensland, and Elders Rural Bank.

Lower levels of exposures to large corporate loans prevented an overwhelming blow-out in impairment losses, rising 64 per cent to $414 million in contrast to a 192 per cent leap to $6.5 billion experienced by the major banks.

The current environment will demand regional players focus on funding, capital and limiting growth to profitable sectors, Mr McGrath said.

"Cost control will also be a major priority."

More sector consolidation is also on the cards, and will be led by the big banks in the short term.

"We expect that further acquisitions by the regionals will be put on the back burner until financial markets stabilise," Mr McGrath said.

Late last month KPMG head of banking Andrew Dickinson said he expected a two-tier banking system to emerge as mid-tier players relying on wholesale funding fell by the wayside.

Mr Dickinson nominated Suncorp-Metway and Elders Rural as institutions likely to be swallowed by their competitors.