Loan Books Are Cruising For A Bruising
Sydney Morning Herald
Tuesday December 23, 2008
WHILE the Commonwealth Bank has been busy putting out spot fires after fumbling its $2 billion capital raising last week, bad debts on its books have piled up faster than expected.
After years of record low losses on lending at the big four banks, credit quality is running up to its highest level in more than 15 years. No one is suggesting Australian banks will face losses as savage as those of the early 1990s, but further bad debt expenses will weigh on profits. At the end of the 2008 financial year the nation's banks set aside more than $4 billion in additional provisions to cover lending losses. Billions more will be needed this year as fresh problems bubble up. Many companies have been surprised at how fast the global market downturn has crimped cashflow. Those looking to renew credit have had lending lines suddenly closed off as normal sources of financing dry up. The first wave of bad banking debts involved exposure to such highly geared businesses as Babcock & Brown and ABC Learning. The so-called second wave will flow from the real economy, said an analyst at Wilson HTM, Brett Le Mesurier. "If the debt capital markets remain in their current shape for the next year it will result in increased credit-rationing on the part of the banks and will significantly increase refinancing risk for corporates." Mr Le Mesurier downgraded his recommendations on Westpac, National Australia Bank and ANZ, warning that the likelihood of higher bad debt charges had not been factored into their share prices. CommBank was left unchanged because the 56 per cent slump in its share price had largely factored in most of its bad debt increase, he said. CBA operates the nation's biggest mortgage book, but its problems are squarely clustered among business loans rather than retail customers. Retail portfolios are less risky than business loans, with losses in mortgages and credit cards driven by employment rates, which lag the business cycle. CBA was not alone in warning investors that losses were about to get worse. Last week the outgoing chief executive of NAB, John Stewart, said the environment would be "more difficult for all banks" as the economy slowed. Mr Stewart said banking was about to enter a period in which lending growth slowed and impairments rose, although he would not predict any figures.
© 2008 Sydney Morning Herald