Five factors the banks will be watching in 2012 – and you should too

The health of Australia’s banking sector is often a good barometer for the health of the rest of the economy.

This has been underlined in the last few years. While banks in the United States and Europe feared for their lives in the midst of the GFC, Australia’s banking sector was relatively protected. So too was our economy – again, relatively being the key word here.

Given this close connection, it’s worth examining a research note from Morgan Stanley’s Australian analysts, looking at five indicators that will influence bank share prices this year.

It’s a good little list – these are five factors that SMEs will need to watch closely in the 2012:

1. Unemployment rate

The slight rise in the unemployment rate in December to 5.3% was a little bit of a worry. While Australia’s jobless rate is historically low, the potential for further job losses is something that needs to be monitored, particularly from a large employer like the retail sector. The problem isn’t so much the jobless rate but what it will do to consumer sentiment. Households that are worried about job security simply won’t spend.

2. House prices

House prices fell slightly in 2011 and appear set for a period of low to minimal growth over the next five years. Given the banks’ reliance on mortgage lending to drive growth, that’s obviously a concern. But businesses need to watch house prices too – and not just because so many entrepreneurs secure business loans against their homes. Falling house prices are another weight on consumer confidence and household consumption. Let’s hope the increase we saw in house prices in November represents a stabilisation of the market.

3. Retail sales

Clearly, the health of the retail sector says a lot about the health of the wider economy. But the banks have a particular reason to watch retail sales – they are worried about their exposure to the retail sector and don’t want to see a fresh spate of retail collapses. SMEs should be worried about retail collapses too – not only would they add to the unemployment numbers, but they will also impact business confidence and potentially banks’ willingness to lend to small business.

4. Business sentiment

Getting a sense of business confidence has been tough over the last few years. Frankly, businesses have been overly optimistic about conditions for much of the last three years, until about the middle of 2011 when reality set in. Sentiment has improved slightly in recent months and will hopefully continue to do so in the first few months of 2012, as the combined impact of two interest rate cuts starts to lift spirits. But keep an eye on this throughout the year – particularly if you are a business-to-business entrepreneur.

5. Credit growth

Obviously this is a key indicator for the banking sector, but entrepreneurs should keep an eye on this too, as it provides insight into the willingness of businesses and households to invest. What the banks (and the rest of us) want to see is credit growth improve thanks to the interest rate cuts.