Financial Services

Big banks are tipped to face a trifecta of soft economic conditions, uncertainty over new rules, and higher charges for bad debts in 2015. But barring a severe economic shock, these "headwinds" are unlikely to disrupt the industry's run of record-breaking profits, analysts say.

Commonwealth Bank, Westpac, National Australia Bank and ANZ chalked up $28.6 billion in combined profit in 2014, helped by a recovering housing market and very few borrowers defaulting.

Looking ahead, bank-watchers predict similar performances in the year ahead, despite much-hyped regulatory changes and the absence of a sharp economic rebound.

Even though the economy is not booming, banks are benefiting from strong credit quality, and healthy demand for home loans.

The financial system inquiry, chaired by former CBA chief David Murray, dominated public discussion in banking in 2014, with investors fretting over the prospect of tougher capital charges.

But the final report published in December was less prescriptive than feared, saying Australia's banks should be "unquestionably strong". Even if exact details of the changes are in the banking regulator's hands, ANZ, NAB and Westpac all signalled they were well placed to meet tougher capital rules.

Bell Potter analyst TS Lim plays down the likely impact of the inquiry, at least in the shorter term, as any capital changes would not take effect for several years. He is predicting earnings growth of 5 to 6 per cent for the big four banks.

But not all analysts are as bullish as Lim. An investment analyst at Watermark Funds Management, Omkar Joshi, points to the drag of any increase in capital, as well as higher bad debt charges. He believes these changes will make it harder for dividend growth to continue at its recent pace.

Unemployment is also tipped to rise, and Joshi says it is likely the big banks' bad debts will start to increase from their lowest levels since 1995. This would eat into profits, which have recently been enhanced by declines in bad loans.

These risks, however, are likely to edge up slowly, not suddenly.

Analysts have been predicting a rise in bad debts for more than a year, but the steady decline in interest rates has shielded them somewhat because few borrowers are falling behind on their repayments.

A related change facing the major banks is the prospect of new limits on lending to housing investors; such lending

grew 9.9 per cent in the year to October.

But the Australian Prudential Regulation Authority has said it will impose tougher rules on banks that grow faster than 10 per cent – effectively capping investor lending at its current growth rate.

Morningstar's head of banking research, David Ellis,

points out that even if it does limit credit growth, banks have managed to churn out ever higher dividends in recent years despite investor housing growing well below 10 per cent.

The more serious threat would be a dramatic slowing in the economy, he says, but few are predicting this will occur.

– Clancy Yeates

Retail 

Retailers are in the sales business, so you can't expect them to talk down consumer sentiment.

But there's no denying that retail – the $23-billion-a-month sector that contributes about 5 per cent of gross domestic product – will be in the firing line this year if the Australian economy softens further.

Deloitte Access Economics tips retail spending to increase by just 2.5 per cent in calendar 2015, excluding the impact of inflation. Standard & Poor's has tipped retail conditions to "remain subdued given the softening GDP growth and likely rise in interest rates".

December, the crucial month in retailing, is estimated to have been slow but strong, saved by discounting to spur Christmas sales. Industry groups and analysts are upbeat about how retailers fared over the holiday period.

But challenges remain. As the Productivity Commission noted in a recent report, retail sales growth has slowed since the late noughties, averaging just 2.4 per cent in the years between 2008-09 and 2013-14, compared to 3.4 per cent in the previous five years.

If a recession is coming, household spending on durable goods – clothing and footwear, furnishings and household goods and vehicles – can be expected to get crunched.

Meanwhile, Australian online retail sales rose 12 per cent year on year to $16.3 billion in the 12 months to November 2014, NAB figures showed, and now make up about 7 per cent of all retail sales, according to UBS analyst Ben Gilbert. But the fall in the local currency since September, and Australian retailers becoming more competitive on pricing, is likely to weaken that attraction.

The fall in the Australian dollar will also challenge local retailers as their hedging expires and the cost of imported goods increase.

If consumer sentiment remains fragile, it will be difficult for retailers to wean Australians off the big discounts they have enjoyed for years.

As Eric Morris, the CEO of clothing retailer PAS Group, told Fairfax Media recently, end-of-season sales in the US provide discounts of 20 to 50 per cent. In Australia? "Sometimes our people don't get out of bed for much less than 50."

– Madeleine Heffernan

Resources

The mining and resources world has officially been turned upside down, with the stars of 2015 likely to be those who struggled through the past five years of "the mining boom".

Nickel and bauxite, the latter being the main ingredient in aluminium, have stepped out of the shadows of iron ore, oil and coal to carry the hopes of the resources industry in 2015.

Nickel famously rose from the dead in the first half of 2014 as speculators responded to an export ban in the world's biggest nickel-producing nation, Indonesia.

Much of those gains were eroded prior to Christmas as the market remained in surplus, but CLSA analyst Andrew Driscoll is convinced the nickel story is more than a flash in the pan.

"Copper remains our preferred commodity on a longer-term view, but we believe nickel has the most upside potential [this] year," he said.

The year also shapes as a defining one for the big two, BHP Billiton and Rio Tinto, which both have major issues to handle over the next six months.

BHP's planned demerger appears likely to be approved by shareholders when they vote in May, despite the dramatic fall in prices for its most important commodities.

Rio could face a second takeover or merger approach from Glencore, meaning chief executive Sam Walsh has a big incentive to keep shareholders happy in 2015.

The one certainty is that those two companies will continue to grow their exports of iron ore in 2015, further stressing a market that despite being past its peak will welcome a very notable new producer in 2015.

Gina Rinehart's Roy Hill mine is scheduled to ship its first product out of Port Hedland in September.

While the many delays to the project over the past decade have ensured it has missed the best of iron ore prices, the product from Roy Hill should still hit the market with a lower cost of production than the likes of Fortescue Metals Group, Atlas Iron and BC Iron.

That should be enough to ensure survival, for the immediate future at least.

– Peter Ker

Media

Change has become a constant in the media industry and, if you believe the experts, 2015 is shaping to be a year like no other.

Television has been dominating the headlines, with traditional players forging unlikely partnerships to combat the arrival of US streaming juggernaut Netflix, which has a $20 billion market capitalisation and produces hit shows including House of Cards and Orange Is The New Black.

Struggling free-to-air broadcaster Ten Network Holdings could also change hands, with its independent directors assessing four takeover offers for the company.

"We anticipate 2015 will be an incredibly dynamic year and the media industry will undergo more change that we've seen in the last five years combined," said Scott Lorson, chief executive of internet-based pay-TV company Fetch TV.

As with any big bets, there are big losers, particularly as viewing habits change.

Australians are being offered three new streaming services this year. In addition to Netflix, Seven West Media has partnered with Foxtel to reboot Presto Entertainment, while Nine Entertainment has joined forces with Fairfax Media – owner of BusinessDay and The Australian Financial Review – to create Stan.

The trio join Quickflix, which already operates a subscription video-on-demand (SVOD) service. But analysts and industry players have questioned whether the Australian market can sustain two, let alone four SVOD services.

Mr Lorson is among the sceptics, describing the new SVOD operators' business models as "shaky at best".

But the bosses of the new streaming services believe they are on firm ground.

Stan chief executive Mike Sneesby said the market would be competitive, describing it as "a war of content acquisition and secondly it's a fight to ensure that consumers know your product is a world-class, market-leading product".

Meanwhile, Communications Minister Malcolm Turnbull has shelved the Abbott government's media reform package, which planned to review laws that ban mergers between metropolitan and regional TV stations and the "two-out-of-three rule", which stops companies from owning TV, radio and newspaper assets in the one city. It means it is likely to be a quiet year for merger and acquisition activity among television and print-based companies.

"You'll probably see more action in the online space than the traditional media," Morgans Media media analyst Ivor Ries said.

But James Philips, a partner at law firm MinterEllison, who has executed deals valued at more than $100 billion during his career, said more joint ventures were possible.

– Jared Lynch

Aviation

After one of the most bruising battles in years, Qantas and Virgin Australia have left investors hoping this year will finally be when they benefit from clearer skies.

It's certainly a big major turnaround from a year ago, when Qantas was pleading for financial assistance from the federal government and accusing Virgin's three main shareholders of "predatory" behaviour.

Now, in the wake of a cost-cutting program that has worked faster than expected and a ceasefire in the capacity war in the domestic market, Qantas has forecast an underlying pretax profit of up to $350 million for the first half, compared with a $252 million loss in the same period a year earlier.

While Qantas's share price has given up some of its recent gains, it is still up 82 per cent since October, in the wake of both its profit forecast and a rout in oil prices.

While airlines will have to wait for their fuel hedges to expire, they stand to benefit in the second half of this financial year from the plunge in their single biggest cost.

Virgin has been more circumspect about its fortunes this year, forecasting a pretax profit in the second quarter of this financial year – a period that is typically the most profitable for Australian airlines.

Virgin expects Tigerair Australia, which it took full control of late last year, to break even by the end of next financial year – six months earlier than forecast. But the budget airline has had a chequered history since it began flying in Australia in 2007, and will nevertheless weigh on its parent.

While fuel prices offer clearer skies for the two largest airlines, smaller carriers heavily exposed to charter flying are feeling the pain from a slowdown in the resources industry.

And lingering concerns about Australian consumers' willingness to spend has also dented investors' enthusiasm for Flight Centre and online travel agent Webjet.

– Matthew O'Sullivan