Fresh worry: Aussie banks face high bad-debt charges

Canberra / Bloomberg

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 surveyed by Bloomberg.
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.

Valuations drop
The lenders’ stock valuations fell to levels last seen almost four years ago. The big four banks last month traded at the lowest price-to-earnings 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.
All this is happening against a worsening backdrop for the global economy, corporate profit growth that is slipping and an Australian economy on the brink of reversing gains from a record-low central bank cash rate and a falling Australian dollar that lifted business conditions and fueled hiring in tourism and education.
It’s a different story this year. The collapse of Dick Smith has cost about 2,500 jobs and crumbling commodity prices prompted miner South32 Ltd. to announce plans to fire more than 1,700 people.
Gross company operating profits fell 2.8 percent in the three months ending Dec. 31, the sharpest decline since the quarter ending June 2014, according to the latest government statistics last month. Mining companies led with a 6.2 percent drop, the data shows.
Four companies in Australia’s benchmark stock index have been downgraded this year by either Standard & Poor’s or Moody’s Investors Service. Among those cut were miner BHP Billiton Ltd. and Rio Tinto Group, which have been plagued by the slide in commodity prices.
That, combined with the global financial market turmoil, has driven up the cost of insuring Australian corporate debt against non-payment. The Markit iTraxx Australia index ofcredit default swaps surged 59 basis points in the 12 months through March 3 to 142 basis points, CMA data show.
“We see the credit cycle as having turned now,” Ilya Serov, Sydney-based senior credit officer at Moody’s, said. “This indeed reflects the pressures coming from the falling commodity markets. Second-order macroeconomic effects may play a more significant role if the downturn in mining proves even sharper and more prolonged than we currently anticipate.”