Bank credit impairment charges will rise over the next couple of years but bad debts and provisions as a proportion of loans on the books will only return to the long-term average, remaining well below the bad debt spikes during the financial crisis and the pandemic lockdown period.
This is the view of Macquarie Securities, which has forecast the bad debt experience of the big banks out to 2025/26. Its conclusion: “It hardly resembles a credit cycle.”
Macquarie has calculated that over the past 20 years the average ratio of bad and doubtful debts to gross loans and acceptances of the Big Four has been 25 basis points.
Bad debts to GLAs hit 82 bps in 2009, the worst year of the financial crisis, and 42 bps in 2020.
ANZ reported an impairment benefit of A$232 million in 2021/22. Macquarie expects it to report an impairment charge of $589 million for the year to September 2023, representing 9 basis points of gross loans and acceptances.
For 2023/24, Macquarie expects ANZ to report a charge of $1.3 billion (18 bps of GLA) and for 2024/25 a charge of $1.6 billion (22 bps of GLA).
Commonwealth Bank reported an impairment benefit of $357 million for the year to June last year. Macquarie expects it to report a charge of $1.1 billion for the year to June 2023 (12 bps of GLA), $1.5 billion in 2023/24 (16 bps of GLA) and $1.7 billion in 2024/25 (18 bps of GLA).
NAB reported an impairment charge of $125 million in 2021/22, representing 2 bps of GLA. Macquarie expects it to report a charge of $987 million for the year to September (14 bps of GLA), $1.4 billion in 2023/24 (20 bps of GLA) and $1.6 billion in 2024/25 (22 bps of GLA).
Westpac reported an impairment charge of $335 million in 2021/22, representing 5 bps of GLA. Macquarie expects it to report a charge of $945 million for the year to September (13 bps of GLA), $1.3 billion in 2023/24 (17 bps of GLA) and $1.4 billion in 2024/25 (18 bps of GLA).
Macquarie said banks appear to have de-risked their portfolios. Combined with borrowers’ strong cash buffers this has put them in a strong position.
The biggest risk the banks face is in their oversized exposure to the highly geared household sector. Macquarie said that while it is increasingly likely households will experience more debt stress, low unemployment and high savings levels are mitigating factors.
“Rising unemployment is the key downside risk,” it said.
Macquarie said it expects the biggest stress to occur in business lending, as higher interest rates reduce consumer spending and tighter liquidity reduces access to credit. The riskiest sectors are commercial real estate, construction, hospitality and retail.
Macquarie added the caveat that the extent of the increase in impairment charges was difficult to forecast because of the unusual combination of high inflation and interest rates with low unemployment, wage growth and savings buffers.
Overall, it is forecasting “a modest pick-up in impairment charges”.
It said current collective provision coverage is adequate but not excessive and it expects banks to build their collective provisions over the coming 12 months.