Credit quality still weak among smaller corporates

Rob Whitfield, the head of Westpac Institutional Bank, told the Financial Review the bank expects impairments to continue to emerge among smaller corporate borrowers.

"You are going to see a very good performance in impairments for the institutional business in 2011," he told the newspaper.

"But the smaller end of institutional banking responsibilities continues to see very significant stress levels. There are some businesses that continue to see some cash flow pressure, not only because of the increase in interest rates, but because of some subdued demand in the retail sectors."

Banks reported a decline in the level of new impaired assets in the September 2010 quarter and expectations are for a further fall in the December quarter. National Australia Bank, in a trading update this morning, and Commonwealth Bank, in its interim financials report tomorrow, will provide some detailed insight into these trends.

On the other hand, Westpac is looking to a recovery in demand for corporate credit, driven by larger businesses, in the second half of this year.

"There could be some deleveraging, and companies looking at other companies that have allowed their balance sheets to become lazy," he said, in a separate interview with The Australian.

"I would expect balance sheets to be put to work more in the second half of this year.

"I don't think we are going to see a V-shaped recovery (in credit demand) - it will still be more of a grind - but we are encouraged by the pipeline.