Bad debts just starting to spread through SME sector

Westpac’s market update has provided further evidence that the deteriorating economy is causing problems for a wide cross section of medium-sized and large businesses.

Market interest in Westpac’s piece of the bad debt puzzle was extraordinary. Almost 200 people dialled in to a briefing this morning by chief executive Gail Kelly and her top three executives.

Kelly went out of her way to explain that the poor performing loans on the bank’s books were not confined to companies involved in property and financial services.

She said “mid corporate and large corporates” in manufacturing, retail and mining services were among the impaired and stressed loan exposures at Westpac.

However, she said the downturn had yet to have a noticeable effect on the bank’s loans to small and medium-sized businesses. Westpac has lent about $9 billion to small business.

The expectation among analysts is that small business will be the next shoe to drop in the economic downturn.

Kelly was wary of talking down the economy, but she admitted that nobody knows how deep or how prolonged the downturn will be.

But numbers released today provided some indication that Westpac was not immune from what is already happening. The disclosures exclude St George Bank which was treated as a non-consolidated subsidiary.

In the three months to December, Westpac said its impairment charges rose to $800 million, up from $144 million in the previous corresponding period.

About $360 million of that increase was provisioning for ABC Learning, Allco Finance and Babcock & Brown.

The bank has a $300 million exposure to Babcock & Brown, which raises the question of whether it understood the high risk nature of the Babcock business model.

The bank’s Pillar 3 disclosures prepared for the regulator showed a $930 million increase in impaired loans, but about 75% of that was high-end corporate lending including the three bad names.

Only $46 million of the bank’s $9.3 billion small business loans were impaired at December.

Stressed exposures rose to 1.73% of total committed exposures at December 31. Up from 1.3% at 30 September. Stressed exposures include those on watchlist and substandard, those 90 days past due and impaired.

Watchlist and substandard, which are loans to customers experiencing operating weakness and financial difficulties, are at the highest level in 10 years.

A graph showing the inclusion of the St George loan book showed that its impaired assets have not suddenly blown out.

Westpac’s disclosures about its revenue and interest margins were in line with those released earlier this month by Commonwealth Bank and National Australia Bank.

Revenue is strong, margins are getting fatter, and the institutional bank is experiencing a purple patch. Income from trading is higher because of higher customer-driven volumes and interest income is up from riding the yield curve.

Westpac’s Tier 1 capital remained strong at 8.3% at December and that includes the impact of St George. The other critical disclosure was that St George Bank customers have stuck with the bank after the Westpac takeover.

This article first appeared on Business Spectator

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