Australia's Soaring Banks Set to Slump, Says Economist Dent

By Caroline Henshaw

SYDNEY--Australia's major banks, whose share prices soared in 2012, may lose some of their shine in coming years as weakening commodity demand from China crimps growth in the resource-rich economy, according to a well-known U.S. economist.

Harry Dent said that Australia may well encounter a mild recession by the end of 2014 as a global slowdown sparked by Europe's inability to resolve its debt crisis hurts China's economy over the next couple of years. That could drive bank shares sharply lower since China is Australia's biggest trading partner and a major consumer of its raw materials like copper and iron-ore.

"Mid-2013 things will start to go wrong again in Europe," Mr. Dent said in a phone interview. "That reflects on the U.S. and that reflects on China. Australia may not feel it until 2014, but your stock markets and banks will start to feel it before then."

Australia's largest lenders have long been regarded the darlings of the international banking system after their conservative practices helped them survive the global financial crisis with barely a scratch. Their shares surged last year as investors viewed their high yields and top credit ratings as a safe bet amid continuing global economic uncertainty.

Commonwealth Bank of Australia (CBA.AU), the country's largest lender by market value, jumped close to 30% in 2012, while shares in rivals Westpac Banking Corp. (WBC.AU), Australia & New Zealand Banking Group Ltd. (ANZ.AU) and National Australia Bank Ltd. (NAB.AU) also rallied hard.

This week, Commonwealth Bank's market value topped 100 billion Australian dollars (US$105 billion) for the first time ever making it worth more than the entire German banking system, the Datastream Global Banking Index showed.

According to Mr. Dent, however, the good times may be nearing an end for the so-called Big Four. A major economic slowdown in Australia would drive a surge in bad business loans in the resources sector particularly, he said, and could wipe as much as 20% off house prices--which would weigh heavily on all of the country's lenders.

"I would not want to own Australian banks," said Mr. Dent, who uses long-range demographic modelling to predict economic trends. The economist accurately forecast a slowdown in Japan during the 1980s, while the economy was performing robustly.

Some analysts have said that Australia's lenders would also be hurt in the coming months and years by slowing credit growth, higher funding costs and more stringent international capital regulations.

Signs of slowing credit growth are already apparent. Official data this week showed business-sector credit growth contracted at the fastest pace in almost a year-and-a-half in November, while housing-sector credit growth slumped to a record low in the 12 months to November.

Weakening domestic growth may also contribute to falling asset values, which in turn could hurt bank balance sheets and put pressure on their profits in fiscal 2013, Nomura analyst Victor German wrote in a note to clients on Thursday.

A spokeswoman for Commonwealth Bank declined to comment on the outlook for banks' share prices. Spokespeople for the other lenders didn't immediately return requests for comment.

Write to Caroline Henshaw at caroline.henshaw@wsj.com

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