Banks profits vulnerable as cycle turns

Brian Johnson, head of research at investment bank JP Morgan warned that up to eight per cent of banks' earnings could be wiped out if there was even a modest increase in the number of home owners and businesses that could not repay their loans. “Even if you have a modest up-tick in loan losses to what I would have thought to be the low point in the cycle, you have just wiped eight per cent of the earnings of most of the Australian banks,” he said. “So we think the earnings risk is increasing dramatically.” Johnson argued that some “very scary dynamics” were emerging as the banks increasingly pursued high risk lending opportunities, such as low documentation loans.