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Monday 30th June 2003

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Solid loan volume growth, particularly within the home mortgage sector, good cost containment, and moderating bad debt expenses underpinned the record half-year 2003 results of the four major Australian banks, according to a report released by Standard & Poor's Ratings Services.

"Domestic growth in Australia, underpinned by the booming property market and strong domestic spending, has continued to compare favorably with international markets," Standard & Poor's credit analyst Peter Sikora says.

"Cash earnings have continued to improve, adding to the already impressive performance track record at all the major banks, despite the ongoing tightening of net interest margins since the late 1990s, a scattering of loan loss provisions against some high-profile corporate collapses, and a range of noncash write-offs relating to accounting adjustments and asset revaluations," Sikora says.

Some moderation in growth opportunities within the housing sector is expected to emerge through the second half of fiscal 2003 and into 2004 as the housing cycle slowly runs out of steam, although the major banks are all expecting a moderate upswing in business investment to support growth in business lending and provide added impetus for revenue growth.

Major asset quality indicators at the major banks are at historic lows, with nonperforming asset levels and credit losses lower than their international peers'. Although Standard & Poor's views the rise in private sector indebtedness and rising property prices with caution, no major asset quality fallout is anticipated.

Over the medium term, the major banks will be looking for greater revenue contribution from recently expanded wealth management businesses, which have struggled in the recent difficult investment environment.

Other emerging trends have been a stronger refocus on customer satisfaction and outsourcing arrangements, which Standard & Poor's is closely monitoring for their potential impact on bank credit profiles.

The high use of independent mortgage brokers also is being monitored, including the broker selection process, the banks' cost to net interest margins, and the franchise impact of customers no longer using direct-banking distribution channels.

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