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Profit season is not following the bear script

As the bank bears point out, problem loan levels are so low they will eventually rise. Photo: Jim DarbyThe December half profit season has just begun, but a theme is already emerging. The fears that drove the markets into correction territory last week aren’t turning up.

On Tuesday, NAB followed last week’s clean December half profit from CBA with a December snapshot that like CBA’s showed virtually no evidence of the commodity price meltdown or the market slump.

Stripped of the UK banking business that NAB spun out late last month, underlying earnings were 8 per cent above the December 2014 quarter.

NAB’s charge for bad and doubtful debts halved to $84 million, and its ratio of 90 days past due and gross impaired assets to gross loans and acceptances was basically unchanged and still very low, at 0.68 per cent compared with 0.63 per cent at the end of September.

As the bank bears point out, problem loan levels are so low they will eventually rise, but the banks are not too exposed directly to the resources sector retreat. CBA said last week that its loans to the mining, oil and gas sectors accounted for only 1.8 per cent of its total lending. NAB chief executive Andrew Thorburn said on Tuesday that the same sectors accounted for less than 1 per cent of NAB’s loan portfolio.

The insurer and annuity specialist Challenger’s shares closed 4.7 per cent higher after it announced an 18 per cent rise in first half underlying earnings that also showed no major signs of market-related stress.

Challenger chief executive Brian Benari says that the group exceeded its regulatory capital minimum by 55 per cent at the end of December – and says the buffer was actually slightly fatter at the end of January, despite the market gyrations.

CSL announced a 7 per cent rise in underlying December half profit, and double-digit sales growth for its suite of blood plasma products that sit of the heart of the business.

CSL is not a cyclical business, but it does have an economic barometer in the 130 blood collection centres it operates in the United States.

They are an inverse indicator: supplies strengthen in times of economic weakness, and weaken in times of economic strength. CSL chief executive Paul Perreault says there is no blood drought – but he sees nothing in the network to suggest that the US economy and job market are deteriorating, either.

Have the markets got it wrong? Goldman Sachs seems to think so in a new report, “nothing to fear but fear itself,” which looks at gold’s angst-ridden rally from a mid-December low of $US1053 an ounce and a New Year starting price of $US1062 an ounce to a one-year high of $US1247.98 on February 11, and a still fearful $US1192 an ounce.

Fears about oil’s price slide, negative interest rates and the safety of the banking system pushed the gold price higher, but they ignore the fact that the global financial and economic system is not in danger of becoming unhinged, Goldman says, adding: “Banks have ample liquidity to maintain funding against higher capitalisation, the negative macro impacts from low oil prices have likely already played out and are not systemic, while the spillovers from China are limited and the US is far from recession.”

The financial markets have overreached to the point that “current inflation break-evens would require oil prices to keep declining for the next seven years”, the investment bank adds.

European banks were a focus of last week’s sell-down. Goldman argues however that they still have access to three-year-old and so far little used European Central Bank funding facilities, and that there is no sign of major stress in the capital markets they tap.

The oil price was rising on Tuesday afternoon as news that the Saudi Arabian and Russian oil ministers were set to meet in Qatar raised hopes of an agreement to curtail the production surge that derailed the oil price in mid-2014.

That may or may not happen, but Goldman says the oil markets are much less sensitive to oil price falls now after oil’s dizzy descent from about $US100 in mid-2014 to a low of just over $US26 a barrel last week.

The gold price rise is the Goldman report’s focus. Its argument that the markets have overreached on the way down can be more generally applied however as key profit reports here raise hopes that the market selloff will not mainlined by the economy.

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