Bad debt charges down but impairments still rising
The highlight of the major banks' interim earnings reports over the past couple of weeks was the big fall in bad debt charges. What did not get so much attention was the fact that loan impairments continued to rise.
Total bad debt charges for the big four banks dropped from $6.7 billion in the second half of the 2008/09 financial year to $4.5 billion in the latest half. Reduced bad debts charges - which in turn were largely a function of write-backs of prior provisions - were a big part of the improved profit reports for the half.
Whether this trend continues in the second half depends on the extent to which rising impairments lead to bad debt charges.
The head of financial services at KPMG, Michelle Hinchliffe, said: "The losses are down but the problem is still there. What we are seeing is a move away from institutional exposures to business banking and consumer delinquencies.
"Those exposures have better security and therefore the losses that will result from the impairments are likely to be lower than what we have seen in the past year.
"We have not seen the release of economic overlays in the provisions. Those provisions will be released at some point and the reduction in the collective provision will offset the increase in the individual provisions.
"I would expect the charges to be lower again in the second half but it is difficult to say how much."
NAB's bad and doubtful debt charge fell 32 per cent to $1.2 billion over the 12 months to March.
The bank's gross impaired assets increased from $3.9 to $5.5 billion between March last year and September, an increase of 41 per cent. The growth rate slowed to five per cent in the latest half, as gross impaired assets grew from $5.5 to $5.8 billion.
The bank's gross impaired assets plus loans 90 days past due as a percentage of gross loans and acceptances has risen from 1.3 to 1.8 per cent.
Increases were in business banking, UK banking and New Zealand banking. Personal banking and Great Western reported falls in impaired and delinquent loans.
Westpac's bad and doubtful debt charge rose from $1.5 billion in March last year to $1.7 billion in the September half but then fell 48 per cent to $879 million in the latest half.
The value of gross impaired assets rose 12 per cent from $3.3 billion in March last year to $3.7 billion in September and then 16 per cent to $4.3 billion in the latest half. The value of items 90 days past due increased by 27 percent over the past six months.
Impaired assets to gross loans increased from 73 basis points in March last year to 81 basis points in September and 90 basis points in the latest half.
ANZ's bad debt charge rose from $1.4 billion in March last year to $1.6 billion in September and then fell 34 per cent to $1.1 billion in the latest half.
The value of ANZ's gross impaired assets rose 19 per cent from $3.7 billion in March last year to $4.4 billion in September and then 20 per cent to $5.3 billion in the latest half. Gross impaired assets as a percentage of net advances have risen from 1.03 per cent to 1.53 per cent over the past year.
Commonwealth Bank's bad debt charge fell from $1.9 billion in December 2008 to $1.4 billion in June last year and then fell to $1.38 billion in December last year.
Gross impaired assets rose 55 per cent from $2.7 billion in December 2008 to $4.2 billion in June last year and then 14 per cent to $4.8 billion in the December half. Gross impaired assets as a percentage of gross loans and advances have increased from 86 to 96 basis points.
Speaking at NAB's interim results presentation last week, the bank's chief financial officer Mark Joiner said: "The arrival rate of new problem loans is diminishing. We see no need to build the collective provision any further."
Westpac chief financial officer Phil Coffey said: "We've now had three consecutive quarters with little change in the percent of stressed exposures, and that's a good sign that asset quality has stabilised, and I say stabilised because we are still seeing downgrades within stressed facilities.
"So while the environment has improved and we have seen a handful of upgrades, we are still seeing more downgrades. What is encouraging though, is that we're now spending the bulk of our time working through existing stress rather than worrying about new, emerging issues.
"Consumers continue to perform well, but as we alluded to last year, this sector is typically the last to be impacted through a slow down, and that trend continues to play out.
"As a result, the proportion of consumer losses in our impairment charges has increased particularly in the last quarter, and this is also reflected in our delinquencies, particularly around secured personal. Losses on mortgages remain very low and the overall portfolio is performing very well."