The declining fortunes of Australia’s once-booming resources sector have caught up with Australia’s banks.
The ANZ bank today announced it expects bad debts to blow out to at least $900 million for the first half of its financial year.
Recent developments with a small number of the bank’s Australian and multi-national resources-related loans will increase total credit charge by at least $100 million for the six months to the end of March.
At the close, ANZ shares were down 5.2% to $24.02.
The other big banks were caught in the bad debt gloom. Westpac closed down 4.5% to $30.85, Commonwealth 3.16% to $74.28 and NAB 3.6% to $26.23.
The banks have been under scrutiny since announcing weak full year results for 2015. And analysts are expecting bad debt to rise on weaker activity in mining and some sectors of the agricultural industry.
Retail banking is also being hit. The Commonwealth Bank last month revealed its bad loan expenses are rising, mostly due to higher home loan arrears and losses in the mining states of Western Australia and Queensland. Its loan impairment expenses of $564 million for the six months to December were 28% higher than a year ago.
Westpac, in market update, today also said it expected more bad loans. Consumer bank chief executive George Frazis says impaired unsecured loans will increase by 10% or $25 million when the bank releases its half year results.
Tim Dring, the banking industry expert at EY, late last year noted pockets of loan impairment pressure emerging in Queensland and Western Australia with higher levels of stressed retail loans and an uptick in mortgage arrears.
And the market is expecting more bad news. Bad debt provisions are expected to rise to their highest in eight years by 2018, according to a survey of analysts by Bloomberg.
ANZ’s credit charge was forecast at a little above $800 million when the bank released its first quarter trading update last month.
The bank then warned it had been hit by higher than expected by bad loans in south-east Asia because of slower economic growth and market volatility.
“Our exposure in Asia is predominately short tenor, investment grade lending, nevertheless the slowdown in the region and increased market volatility are seeing credit conditions become more difficult in the second quarter,” the new CEO, Shayne Elliott, then said.
Elliott then forecast the total credit charge would be a little above $800 million this half, compared to the then market consensus of $735 million.
He made the comments when releasing the bank’s quarterly report showing a 4% rise in December quarter cash profit to $1.85 billion. The result puts the bank on track to exceed last year’s weaker than expected $7.2 billion cash profit, a modest rise of just 1%.
The bank today put the blame for the latest unexpected rise in bad debts on the resources sector where players are cutting costs in an attempt to catch falling commodity prices.
“While the overall credit environment remains broadly stable, we are continuing to see pockets of weakness associated with low commodity prices in the resources sector and in related industries,” says acting chief financial officer Graham Hodges.
“This is a challenging part of the cycle for these customers with implications for the banking sector as individual circumstances evolve. We are continuing to monitor ANZ’s exposures carefully and we will keep investors up-to-date with any changes to the credit outlook.”
ANZ’s financial results for the six months to the end of March will be announced on May 3.