"Attached Pattersons August monthly, with a section on the banks. They are more optimistic than I am.

"The general buzz seems to be that their ability to maintain earnings depends largely on the Australian housing cycle which is the bulk of their earnings. Opinions differ as to the sustainability of their mortgage earnings in the light of a determination by the RBA to raise rates 'over the longer term' as they are calling it.

"Already there are significant signs of deterioration in housing and banks so far in their reporting have not tried to dissuade us from that view."

Eoin Treacy's view Thank you for this informative email and for the attached report contributed in the spirit of Empowerment Through Knowledge. Here is a relevant section:

Looking to the following six months or so, the general expectation is that the usually scant trading environment statements will talk down any chance of a pick up in lending growth, as current nervousness - both here and abroad - persists. The resolution of the US debt impasse (albeit temporary!) and signs that Chinese economic growth remains robust should help bolster lending growth, but this recovery process will be a gradual affair.

On the assumption that Australia's FY12 sees economic growth is around 3.0% plus annual CPI growth of around 2.5-3.0%, private sector credit growth of 5-6% looks likely. The stronger than expected September quarter CPI has thrown a spanner in the works, although talk of another monetary policy tightening before 2011 is out remains unlikely. Were rate hike expectations to rise, personal and housing loan activity would remain subdued. At this stage, we would be surprised if the RBA adjusts one way or another before the November board meeting (the first after the release of the September 2011 quarter CPI). Either way, we anticipate that National Bank (NAB) will continue to be an outperformer from a loan book growth perspective, thanks to its price leadership strategy which is bequeathing them increased market share.

Some recovery in the NZ operations of our Big-4 Australian banks looks likely - a point reinforced by a relatively upbeat NZ trading update recently issued by Westpac (WBC). Signs are already apparent that private sector credit growth in the Kiwi economy is on the rise, helped by the relatively low interest rates currently in place. Aligning with this view, the RBNZ in June hinted that it could soon tighten monetary policy settings as the economy regained its composure post the early 2011 Christchurch earthquake.

More generally we anticipate that the banks will become more attentive to cost structures, with cost to income ratios to be gradually wound back over the coming few years.

The Australian Financial sector shares a common characteristic with a large number of country indices. They have broken downwards from relatively lengthy ranges, approximately 18-months in the case of Australian banks, and bounced somewhat over the last few days. While significant potential remains for a further short covering rally, it remains to be seen how well these markets perform when they get back up to retest the lower side of their overhead ranges. Technical damage has been done. More often than not, it is unwise to simply dismiss or rationalise the chart action. Attractive yields may help to cushion declines provided dividends are not cut and at this juncture the capacity of many banks to sustain their payout rates is debatable.