Rising bad-debt charges next hassle for Australian banks
Already faced with higher capital requirements and a housing market past its peak, Australian banks have a new headache to contend with: corporate loans. Bad-debt provisions at the lenders are set to rise to their highest in eight years by 2018, as the chances of defaults in the mining, agricultural and dairy sectors increase, according to a survey by Bloomberg.
Investors are already jittery after profits grew at the slowest pace in six years at three of the nation's four-largest lenders in the latest reporting period. With the commodities rout depressing the mining sector and the jobless rate climbing, there may be little room for improvement.
"We are cautious on the banks," Anton Tagliaferro, who oversees A$5.9 billion ($4.3 billion) including shares of Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia Bank Ltd. as investment director at Investors Mutual Ltd. in Sydney, said in an interview. "There is dilution as they issued new shares. That, along with the likely turn in bad debts, means it's hard to see banks' earnings going up substantially in the coming years."
The three lenders and Australia & New Zealand Banking Group Ltd. -- the so-called four pillars because of a policy that prevents them from merging-- raised a record total A$20 billion last year to meet regulatory capital requirements.
They posted combined bad-debt charges of A$3.8 billion, up 9.3 percent from 2014, and the first time the measure had increased in six years, according to their filings.
Money banks need to set aside for loans deemed likely to sour is set to hit A$7.2 billion by 2018, the highest since 2010, according to the mean estimate of five analysts.
David Lording, a Sydney-based spokesman for Westpac, said the lender didn't expect a "major deterioration" in asset quality as corporate and household balance sheets were in good shape. The bank does, however, "expect addi- tional stress to emerge in some specific sectors and geographies where conditions have been more challenging, and we are monitoring and managing these areas very tightly," he said in an e-mail.
Spokeswomen at Commonwealth Bank and National Australia declined to comment specifically on the outlook for bad-debt charges and referred to comments made by the lenders last month when they said asset quality remained strong. ANZ Bank's Melbourne-based spokesman Stephen Ries referred to comments the lender made in February that it expects baddebt provisions in the second half of the year to be higher than analysts' expectations.
Provisions for bad and doubtful debts fell A$5.4 billion between 2010 and 2015, helping the four lenders rack up six-consecutive years of record profits, data compiled by Bloomberg show. Bad debts dropped to 0.9 percent of total loans as of June from a peak of 1.9 percent in 2010, according to the Reserve Bank of Australia.
Combined profit growth at ANZ Bank, Commonwealth Bank and Westpac is set to decline to 4.5 percent a year in the four years to 2018, half the average pace of the previous four years, according to the mean estimate of 10 analysts surveyed by Bloomberg. National Australia will fare better as it exited struggling businesses last year.
The lenders' stock valuations fell to levels last seen almost four years ago. The big four banks last month traded at the lowest price-toearnings multiple since mid-2012.
Troublesome exposures -- those corporate loans that are still performing but under stress - - have stopped falling for the first time since the global financial crisis, UBS Group AG analysts led by Jonathan Mott said in an investor note Feb. 25. He cited companies such as electronics retailer Dick Smith Holdings Ltd., which is closing down, and law-firm Slater & Gordon Ltd. and steelmaker and miner Arrium Ltd., both of which are trying to restructure debt.