Lenders Face Second Wave Of Property Bad Debts

The Age

Saturday March 15, 2008

Eli Greenblat, Property Editor

THE nation's leading financial institutions may be facing a second wave of bad debts totalling hundreds of millions of dollars as shaky property developers and embattled companies buckle under the weight of the subprime credit crisis.

Analysts, funds managers and investors are worried that banks, as well as non-bank lenders, have more exposure to delinquent accounts than they are letting on.

"My concern is that they haven't provisioned enough for likely bad and doubtful debts," said Tom Elliott, managing director of MM&E Capital.

"Thus far the provisioning we have seen has been very specific against Allco or Centro, but we know about these problems because those companies themselves are listed entities. My fear is that there are a lot of groups out there that have borrowed a lot of money - in particular unlisted property developers - who are going to get seriously caught in a falling market trying to offload assets, and they will also default on loans."

If true, investors could be in for a wild ride this month and next when ANZ, National Australia Bank and Westpac release their financial results. This will be the time the banks decide whether they need to increase their provisions for bad debts.

Only last month, in an unexpected trading update, ANZ's new chief executive, Mike Smith, admitted the bank's annual bad-debt charge was expected to reach as much $1 billion because of exposure to property companies, miners and a troubled US-based bond insurer.

Fear of even worse to come has already caused havoc in the banking sector. The S&P/ASX finance index has fallen 28.8% since the beginning of the year, against a fall of 18.28% by the broader S&P/ASX 200 Index.

The major banks claim they are keeping a tight rein on their lending, an even tighter watch on their biggest borrowers, and are in a much stronger cash and balance sheet position than their US or European counterparts. The Big Four banks' exposure to bad corporate debt has fallen as low as 0.2% in recent years while the number of home owners defaulting on their mortgages has been tiny. But not everyone is convinced.

"The market in general doesn't feel like they have embraced all the bad news that is almost certainly going to come out," Mr Elliott said.

"John Stewart from NAB has come out and said he is comfortable with the bank's level of provisioning. Well, I think that's wrong."

Mr Elliott said the banks should "bite the bullet" and come out with sizeable debt provisioning that will stand up to a worst-case scenario.

"And that's when share prices could start to recover, because shareholders say 'well, one-third of profits this year have been wiped out but let's look to 2009 and things look a lot better'."

Already the cracks are starting to appear in some sections of the non-bank lending sector. Bluestone Group, one of country's biggest nonconforming lenders, has reportedly suspended loans to commercial customers. Last year the firm booked $1.6 billion in new residential mortgages against an estimate this year of $750 million.

These cuts are also part of a wider strategy by many lenders to gain better control of their loan books and minimise the number of good debts turning bad. A second wave of bad debts could come from the property market. Traditionally, it's the smaller developers who get caught out in a credit crunch, and when they default on loans, the banks are left holding the bag. None of the major banks would comment on their particular exposure to this segment of the economy, but many experts are concerned about the estimated 1000 developments under construction along the east coast that are reliant on loans and debt funding. Robert Harding, acting executive director of the Housing Industry Association, said whenever there was a restriction on credit, those most vulnerable were smaller property developers that were highly geared.

"Those developers who are building for themselves and have not sold those units, well there is no protection there for the property developer and that's the risk they took."

The key question is, what exposure do the banks have to these small developers?

"I think there will be more to come out in terms of bad debt," said Constellation Capital Management managing director Doug Little.

He said bad loans housed in the balance sheet under "collective provisions" could soon be trickled into "specific provisions" by the major banks.

"But that is not unexpected because we are currently in an environment of rising interest rates and a slowing economy, and that can take a while to flow into loan defaults - there is a lag."

Mr Little said that Australian banks were in a sound position, and not exposed to subprime mortgages to the extent of overseas institutions.

KEY POINTS

? The major banks are set to lift their bad-debt provisions.

? Smaller developers are most likely to come under pressure.

? Financiers are tightening their lending controls.

The big banks and their bad-debt positions

WHAT they have revealed so far. Three of the Big Four banks will release their financial results in April/May, when more could come out.

Commonwealth Bank of Australia

? Impaired debts of $333 million during the December half, up $138 million on the previous corresponding period.

? Bad debts were about $70 million higher than what most analysts had expected.

? Has confirmed a $160 million unsecured exposure to the troubled property trust Centro.

? Says it has no direct exposure to subprime or US mortgaged-backed debt obligations.

National Australia Bank

? NAB and second lender Bank of Scotland International this month grabbed 52.8 million Allco shares, owned by Allco Principals Investments and its backers, who include founder David Coe and other senior executives.

? NAB is assessing the appropriate provision level for its first-half accounts to cover the exposure, which analysts speculate could reach as much as $90 million.

ANZ

? In February it was revealed the bank's annual bad-debt charge was expected to hit $1 billion after it admitted exposures to troubled property and mining companies and a US bond insurer.

? New provisions of $363 million add to a previously expected bad-debt charge of about $740 million.

Westpac

? Speculated to have $100 million exposure to Allco Finance through a bridging loan.

St George Bank

? Reported to have a $60 million unsecured loan against Allco Finance.

© 2008 The Age

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