ANZ's Warning Signals Resources Threat for Australian Lenders

Updated on
  • ANZ says credit charge to rise on exposure to mining companies
  • Westpac says it may need to boost provisions for five clients

Australia & New Zealand Banking Group Ltd.’s surprise warning of a blowout in bad debt charges is an indicator of the looming threat to Australian lenders from the turn in the commodity cycle.

ANZ, which has the biggest exposure to the nation’s resources sector, said Thursday provisions for bad debts will be at least A$100 million ($75 million) higher than the A$800 million forecast just last month as low commodity prices impact its resource-industry clients. Westpac Banking Corp. may need to raise provisions for five institutional clients, Chief Financial Officer Peter King said.

While two-thirds of loans by Australia’s largest lenders are mortgages, exposure to corporates has turned out to be behind the biggest bad debt cycle in the past three decades, according to a discussion paper from the Reserve Bank of Australia. Bad debt provisions at Australia’s largest lenders are set to rise to their highest in eight years by 2018, as the chances of defaults in the mining, agricultural and dairy sectors increase, according to a survey by Bloomberg earlier this month.

“Resources exposure is becoming an issue for Australian lenders,” said Omkar Joshi, an investment analyst at Sydney-based Watermark Funds Management, which oversees about A$1 billion. “It isn’t just about ANZ and its Asia institutional loans anymore. While total mining exposure is small, challenges widen when one factors in the second order effects, for example from loans to the businesses built around the mining companies.”

Peabody, Arrium

ANZ shares dropped 5.9 percent to A$23.85 as of 2:55 p.m. in Sydney, the most since Aug 7. Westpac dropped 4.6 percent. The benchmark S&P/ASX 200 Index fell 1.2 percent. ANZ has lost 15 percent this year, the most among Australia’s largest banks, compared with a 4 percent decline for the benchmark.

Loans to Peabody Energy Corp., the largest U.S. coal miner, and Australian steel and iron ore producer Arrium Ltd. were among those contributing to ANZ’s forecast increase in charges, two people with knowledge of the matter said. Paul Edwards, a Melbourne-based spokesman for ANZ, declined to comment on customer names.

The forecast reflects the “evolving position with a small number of Australian and multi-national resources related exposures,” ANZ said in the statement. “While the overall credit environment remains broadly stable, we are continuing to see pockets of weakness associated with low commodity prices in the resources sector and in related industries.”

‘Most Exposed’

The big four Australian banks --ANZ, Westpac, Commonwealth Bank of Australia and National Australia Bank Ltd. -- have a combined A$65.6 billion in loans to the resources sector, about 1.8 percent of their total A$3.56 trillion in assets, based on their latest filings.

“Whilst we believe to some extent ANZ’s issues are company specific, ongoing commodity price weakness is likely to translate into higher losses for the sector, with ANZ and Commonwealth Bank of Australia being the most exposed,” Victor German, a Sydney-based analyst at Macquarie Group Ltd., said in a note to clients.

Westpac may need to move the five institutional clients to “higher provisions,” King, the CFO, said on a conference call with investors, without naming the clients.

National Australia will disclose its bad debt charges along with its results on May 5, the lender said in an e-mail. Commonwealth Bank said it will provide a scheduled quarterly update in early May.

Concerned Investors

ANZ’s mining exposure stood at 2.2 percent of its total loans, while the measure was at 1.5 percent for Westpac, 1.8 percent for Commonwealth Bank and 1 percent for National Australia, according to their latest filings. A blowout in bad debts is adding to investors’ concerns after profits grew at the slowest pace in six years at three of the nation’s four-largest lenders in the latest reporting period.

Troublesome exposures -- those corporate loans that are still performing but under stress -- have stopped falling for the first time since the global financial crisis, UBS Group AG analysts led by Jonathan Mott said in an investor note Feb. 25. He cited companies such as electronics retailer Dick Smith Holdings Ltd., which is closing down, and law-firm Slater & Gordon Ltd. and Arrium, both of which are trying to restructure debt.

Arrium, which had net debt of A$2.1 billion as of Dec. 31, said last month it is seeking a $805 million loan from GSO Capital Partners. Peabody Energy is on the verge of bankruptcy, crippled by $6.3 billion in debt. In a regulatory filing March 16, the coal miner said its ability to operate as a “going concern” is in doubt.