Ris­ing bad-debt charges next has­sle for Aus­tralian banks

The Pak Banker - - COMPANIES/BOSS -

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.

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