Australia’s big four banks have an exposure of more than $3 billion from a handful of recent high profile corporate collapses.
Others include the Wiggins Island Coal Export Terminal in Queensland, logistics group McAleese and Peabody with its coalmines in Queensland and New South Wales.
UBS, in a note to clients, says the underlying credit quality of the banks is solid but these exposures will require a substantial increase in provisions which is likely to lead to a material rise in bad debt charges.
Westpac, ANZ and NAB are expected to announce increased bad debt provisions when they report their 2016 half year results early next month. The Commonwealth is due to release its third quarter trading update.
UBS has downgraded its first half earnings per share by 4.3% for NAB, 3.9% for Westpac and 1.3% for the Commonwealth. No change for ANZ, which has already flagged a $100 million rise in resource-related bad debts but has no exposure to Slater and Gordon or Dick Smith.
“The number of corporate defaults the banks are facing at present is not large,” write UBS analysts Jonathan Mott, Adam Lee and Rachel Bentvelzen.
“However, they are significant in size and are high profile. These companies are also well known by equity investors.
“As a result we believe bank shareholders would be disappointed if management did not take a conservative approach to provisioning for these exposures upfront.”
The exposures by each bank, as estimated by UBS:
“Some of these exposures are resources related, and have been impacted by falling commodity prices,” UBS says. “However, others have fallen into trouble as a result of management decisions or overly ambitious expansions.”
UBS estimates the provisions required against the exposure is a combined $1.19 billion across the four banks. The UBS forecasts assume the banks posting bad debt charges in the first half of around $1 billion.
NAB has the largest at $406 million, followed by Westpac at $403 million, the ANZ $21.6 million and Commonwealth $166 million.
Here are the provisions expected, as calculated by UBS:
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