Risks are rising for the institutions that operate under the “Four Pillars” policy of the Australian government, implemented to maintain the separation of the country’s four largest banks by rejecting any mergers and acquisitions among them.

The policy probably prevented the emergence of a “national champion” capable of competing with the world’s largest financial institutions.

At the same time, along with a proudly “intrusive” regulator, the Australian Prudential Regulation Authority, it may also have prevented Australia’s banks from establishing too much exposure to risks in international banking leading up the Global Financial Crisis.

At Risk

The Land Down Under may be inching toward its first recession in more than 20 years, and the domestic housing market is more and more described as a bubble.

But a recent discussion paper published by the Reserve Bank of Australia concluded that Australian banks would survive a severe economic shock to the country’s households with only limited losses themselves.

Even if house prices plunged by a quarter, likely losses for banks would be “limited” because most of the debt is held by higher-income earners. 

The paper estimates the likely loan losses from a severe shock would equal to “a little less than 10%” of total bank capital.

Meanwhile, the Four Pillars have benefited from a weakening Australian dollar. They borrow abroad to cover the majority of their non-deposit funding needs, and declines in the aussie cut the amount of collateral they need to post on the related cross-currency swaps used to hedge offshore bond issues.

Still Tops

Australia & New Zealand Banking Group Ltd. (ASX: ANZ, OTC: ANEWF, ADR: ANZBY), an original member of the AE Portfolio, has been our top choice among the Four Pillars since September 2011.

Risks associated with its “Greater Asia” strategic focus, along with pressures on its domestic operations, are rising as growth slows.

And management reported that the fiscal 2015 first-quarter net interest margin declined by six basis points, while trading income slid along with commodity prices. But cash profit for the three months ended Dec. 31, 2015, rose 3.5% to AUD1.79 billion.

And management continues to foster a sound risk-management culture, earnings generation is

solid, and the bank is well capitalized. ANZ Banking Group is a buy under USD34.

Remainders

Commonwealth Bank of Australia (ASX: CBA, OTC: CBAUF) reported a 7% increase in fiscal 2015 first-half cash profit on revenue growth of 5%. And gross impaired loans declined to 0.54% of gross loans and acceptances.

And management boosted the interim dividend by 8%. 

Commonwealth Bank is a buy under USD78.

National Australia Bank Ltd. (ASX: NAB, OTC: NAUBF) reported a 6% increase in fiscal 2015 first-quarter cash earnings to AUD1.65 billion on 2% growth in adjusted revenue.

Following a period of strong market-share growth, NAB has consistently trailed its peers over the last two years. National Australia Bank is now a hold.

Westpac Banking Corp.’s (ASX: WBC, NYSE: WBK) domestic asset quality continues to improve, driven by lower interest rates. Although housing credit growth has slowed to industry average levels, Westpac is enjoying strong business loan growth.

Westpac is a buy under USD33.