No deterioration in credit quality, says NAB, but bad debts could still sting
Sydney Morning Herald
Thursday October 29, 2009
The NAB profit result shows that the Australian banks are now operating in a bipolar market. Against all expectations, the global crisis has not spread into a serious rise in defaults on household credit, including home loans, credit cards and personal loans.NAB has lent about $200 billion, or about 46 cents in every dollar it has at risk, to this sector of the economy, and the most startling comment from the chief executive, Cameron Clyne, at yesterday's profit briefing was that the bank so far sees no deterioration of credit quality. This in a year when NAB's overall charge for bad and doubtful debts leapt by $2.3 billion to $3.8 billion.The flip side, of course, is that the experience on business loans has been far worse €“ the source, in fact, of the entire bank bad debt problem.Clyne's comment suggests that banks will endure a significantly milder bad debt cycle than expected. But until business bad and doubtful debts stop rising, there will be uncertainty. The Reserve Bank's assistant governor, Malcolm Edey, highlighted it yesterday and helped push bank share prices lower when he noted that bad debts were concentrated in business lending portfolios, and warned that commercial property exposure was "an area to watch".Clyne said yesterday that the global economic conditions were improving and business sentiment had bounced, but he was still cautious, and caution was evident in a six-month increase in the bank's collective provision for loan losses on risk-weighted assets excluding housing lending from 107 basis points, or 1.07 per cent, to 147 basis points. The collective provision points to loan default trends.That doesn't mean that Clyne's comment about household credit quality can be dismissed. The usual pattern in downturns is for loans losses to begin in big corporate portfolios. That happened again this time as stock exchange boom-time stars hit the wall. Loan losses are then expected to spread out into smaller businesses, and that is also what has happened in the post-global financial crisis downturn: loans to smaller businesses are now the main source of new bad and doubtful provisions.But if the profits results from ANZ today and Westpac next Wednesday confirm NAB's experience, we can declare that industrial relations reform, government stimulus and interest rate cuts have combined so far to quarantine households from the downturn. How did it happen? Government handouts worked to boost corporate revenue and underpin debt-servicing capacity. The corporate debt service bill also came down because the Reserve Bank's interest rate cuts were passed down to business borrowers, albeit less completely than to home loan customers. More flexible work agreements also allowed companies that were experiencing earnings and debt-service pressure to cut hours worked rather than jobs.It's likely the banks themselves have played a part in the interruption of the bad debt transmission mechanism. They have been opting more than they have in the past for unofficial work-outs instead of receiverships and liquidations.This has been more out of necessity than kindness: asset prices collapsed during the crisis as buying demand evaporated, giving the banks no option in many cases but to stay in, and keep their clients on life support. Whatever the motivation, there have been less companies driven to the wall than expected, jobs have held up, and the bad debts cycle is set to be about half as bad as the one that accompanied the early 1990s recession.FEE FESTMacquarie Media's plan to pay Macquarie Group $40.5 million to give up its management role as part of a wider restructuring that will pull debt in its Australian media business, Macquarie Southern Cross, down from $873 million to $318 million is another complicated disengagement of a Macquarie satellite from the founding company, but it should be less controversial than the Macquarie Airports one.MAp justified paying Macquarie a high price on the grounds that anything other than a friendly disengagement would trigger a renegotiation of airport debt, at an annual extra cost of $120 million. MacMedia's deal is intended to produce a debt restructuring €“ a debt paydown €“ and is actually conditional on it.The Maiden family owns NAB shares.
© 2009 Sydney Morning Herald