Australia’s Big Four banks,ranked among the world’s safest,have likely seen a trough in their levels of bad debts after three years of sharp falls,as a near decade-long mining boom falters and the economy cools.
National Australia Bank,the nation’s largest lender,last week flagged the turn in the bad-debt cycle,raising its bad-debts cover for the current 2011/12 financial year by A$250 million ($258 million).
The initial signs of rising bad-debt provisions may unnerve investors who have watched Australia’s top banks report record earnings over the past three years despite slowing loan growth.
While combined 2011/12 profits of the lenders will still top $25 billion,profit growth will be the slowest in three years,and the rising bad debts will likely make life tougher for them next year.
NAB was first to move on provisions because its cover for bad debts was significantly lower than its peers and it has exposure to the underperforming UK market,but investors and analysts warn the charge is set to climb in the next 12 months for all Australian lenders.
NAB’s announcement suggests that the drivers of this charge were not solely driven by the UK but also deteriorating conditions in Australia,Nomura analyst Victor German said.
Ongoing deterioration in economic conditions are likely to lead to an elevated level of bad debts in FY13.
Analysts are now expecting the top four banks’ bad-debt charges to rise between 12 and 20 percent annually for the next two years compared with profit growth of less than 5 percent.
We have certainly hit a trough in the bad-debts cycle. It will only go up now,said Chris Hall,senior investment manager at fund firm Argo Investments,which owns Australian bank shares.
Australia,among the few developed countries to avoid a recession during the global financial crisis,is coming under pressure from slowing Chinese growth. That is weighing on the mining sector that has largely shielded the economy from weakness afflicting Europe and the United States in particular.
The economy grew a solid 3.7 percent in the second quarter but is expected to cool to 3.25 percent or less next year,hurt by a slide in commodity prices.
Australian banks’ bad-debt charges currently stand at about 0.3 percent of total loans,well down on 0.9 percent in 2008/09 during the global financial crisis.
NAB,which is shrinking its UK operations,did not elaborate on which market contributed the most to the rise in bad-loan cover. Despite the increased cover,NAB’s provisions would stand at 108 basis points of total loans compared with 115 basis points for its main peers.
Australia and New Zealand Banking Corp kicks of full-year earnings on Thursday,with NAB and Westpac Banking Corp reporting over the next two weeks. Commonwealth Bank of Australia updates on its first quarter on Nov. 7.
Loan growth slowed to its lowest on record in 2011/12 as Australians increased their savings. That is taking a toll on lenders’ profit growth.
ANZ is seen reporting 4 percent growth in second-half underlying profit of A$2.95 billion,Westpac a similar rise in cash profit to A$3.3 billion and NAB flat cash profit of A$2.8 billion,based on a poll of seven analysts by Reuters.
CBA reported a flat A$3.5 billion cash profit in August. It follows a June-ending year. The earnings are expected to show the momentum shifting back to traditional mortgage lenders Commonwealth Bank and Westpac from ANZ and NAB as a slowing economy further curbs demand for business loans and lower interest rates nudge up mortgage growth.