Asset quality getting worse, not better

Impaired assets worsened over the banking sector over the December 2009 quarter, APRA data shows. The trends across the banking sector, on the APRA data, are, once again, hard to reconcile with the suggestion of bad debts peaking, and even improving, which is the message from most major banks.

Impaired assets increased $2 billion, or seven per cent, over the three months to December 2009, taking the level of impaired assets to $30.8 billion. The Reserve Bank of Australia published the quarterly data (sourced from the Australian Prudential Regulation Authority) on Thursday.

The ratio of impaired assets to total loans increased to 1.18 per cent at December 2009 and up from 1.11 per cent at September 2009. This compares with a pre-crisis low in the ratio of 0.18 per cent.

APRA said banks recognised $7.8 billion in new impaired loans during the December 2009 quarter, and the third highest increment in problem loans during any quarter in the two years since the credit cycle turned adverse in early 2008.

Write-offs were $2.9 billion in the quarter, and the second highest so far in the cycle.

Past-due loans increased by $642 million, or six per cent, to $11.0 billion at December 2009 and this remains the highest reported so far since the cycle began.

Provisions are also at their highest point in the cycle, at $21 billion, though only slightly higher than the level of provisions reported across the sector in each of the June and September quarters.

Management of major banks have generally painted a mildly optimistic picture in their briefings on asset quality over the last month or so.

Commonwealth Bank in its half-year profit, published in early February, said "it appears the loan impairment expense has peaked" but also said any reduction in the impairment expense would be gradual.

Westpac, in a trading update in mid February, said it was expecting "a significant fall in impairment charges".

National Australia Bank, in its own quarterly trading update, said the ratio of loans either impaired or 90 days past due "has been broadly flat since June".

ANZ was the most cautious of three big banks to publish trading updates in February. ANZ noted that "year to date provisions" were down by 35 per cent on the 2009 run rate but said that "caution is required".

ANZ also said that credit quality stabilised in the later stage of 2009 "and has since been showing signs of improvement".