Australian banks have been subject to a considerable amount of bad press over the course of the last 6 months. This has ranged from trader scandals and private wealth and financial advisor misconduct to housing market concerns and bad debt loans. Collectively, the bad news has seen the banking sector perform dismally.
Financials are the largest sector of the ASX and comprise of almost half the index. This means we banks perform poorly, the general market tends to also perform poorly given their influence.
The largest 4 companies on the ASX alone are the major for banks and have a combined weighting of almost 27%. Accordingly, the ASX is not very well diversified and at the whim of the performance of banks.
The latest bad news surrounding banks hit late last week, with both ANZ and Westpac issuing statements that their bad loans will be materially worse than they had previously expected. This has seen almost $25 billion wiped off the big 4’s values in just a matter of 2 days. Although the absolute quantum of bad debts may not be large, it is what they signal that is more concerning to investors.
ANZ
ANZ’s has been the hardest with $6 billion being slashed from its value on the back of news that its bad debts will rise by $100 million. ANZ shares are down 10% from their recent high over the past five trading days. The bank on Thursday said its total charge for bad and doubtful debts for the first half would be “at least” $100 million more than the $800 million figure it had flagged in mid February. The cause for the downgrade was “a small number of Australian and multi-national resources related exposures”, it said
ANZ’s warning on bad debts, while not significant on its own, added to other similar warnings on credit quality, including one last month and another in August. The recent announcement follows a warning by the bank that it is experiencing rising bad loans in its south-east Asian lending businesses, a downgrade that prompted analysts to lower their profit forecasts for the lender.
Most of the concerns centres around ANZ’s institutional lending. There have been a number of high profile company failures recently such as Arrium, Peabody Energy, Dick Smith, and Slater & Gordon. Investors fear that there may be more to come, particularly from the mining and energy sector and are concerned over the quality of the remaining loans in the portfolio.
ANZ’s business mix is skewed more towards institutional lending, and it also has a higher exposure to resources companies than NAB and Westpac.
ANZ has the second biggest amount of loans to commodities companies at around 1 per cent of its book after Commonwealth Bank on 2 per cent.
Westpac
Meanwhile, Westpac has flagged a rise in personal loans defaults in mining-heavy regions. The bank said impaired loans in its unsecured lending portfolio will increase by $25 million, or 10%, in its upcoming half-year results. Although not a large number alone, it does bring into question the credit quality of personal loans in general and what and what the other banks may also have.
Westpac’s consumer bank, George Frazis, believes that the personal loan impairments did not reflect broader problems, but there were a handful of big institutional customers that would be a key influence on its provisions for bad debts this half’s financial results.
