CANBERRA: The health of the Australian banks is a divisive topic, even without global hedge funds betting on their imminent demise. Yet as the banks continue to demonstrate their resilience to the doubters, there’s general agreement on one point: the bad debt cycle has certainly bottomed.
The combination of ultra-low interest rates, conservative lending practices and a relatively healthy economy has meant defaults and bad loans have been an all but absent feature of bank lending in recent years. Meanwhile, the banks have been able to write back bad debt provisions to give their profits an extra kick.
The median bad debt charge for Australian banks has historically been about 0.34 percentage points of all loans, but the banks have been reporting much lower rates, in the teens and single digits, according to Credit Suisse.
Earlier this year National Australia Bank reported its lowest bad debt charge since 1980, an incredibly small $84 million expense for a bank with almost $1 trillion of assets. But wisdom dictated that sooner or later credit conditions will “normalise” and the bank profits would be hit by the inevitable increase in loan losses.
Last Thursday there was the clearest sign yet that those times have arrived. ANZ told investors its bad debt charge for corporate loans would be $100 million higher than it had previously flagged, marking the third time it had delivered a credit related earnings warning in six months.
