Lazy balance sheets pay off

Often criticised in the past for having ‘lazy balance sheets’, companies with conservative growth strategies that don’t rely on leverage are now the cream of the crop, according to specialist international equities investment manager Global Value Investors (GVI).

Using banks around the world as an example, GVI senior equities analyst Matthew Hegarty said those with high levels of retail deposits had the best chance of avoiding the global crisis.

Unfortunately though for local investors, during the ‘easy credit’ era many Australian banks relied on wholesale funding to grow their business, which has negative implications now that the funding has dried up.

“The banks need to rely on their primary source of income — the retail customer — to meet their current commitments, and they are doing this in some cases by increasing mortgage rates above that set by the Reserve Bank,” Hegarty said.

However, he said some global banks, such as those in Scandinavia, chose more conservative growth strategies and are now merely spectators of the global crisis.

“These banks have strong retail deposit franchises, fewer credit losses and little cost of funding increases. These are the types of banks we look for as investors,” he said.