What the banks’ bad news means for entrepreneurs

Just says after NAB shocked the market by announcing $830 million of writedowns, ANZ has announced $1.2 billion of provisions and revealed its cash profit will drop by 20% to 25%.

Just says after NAB shocked the market by announcing $830 million of writedowns, ANZ has announced $1.2 billion of provisions and revealed its cash profit will drop by 20% to 25%. 

The announcements will add to severe pressure already being felt by the banking sector from disgruntled investors. NAB’s shares crashed 13.6% on Friday to $26.54 and have fallen to $25.99 in morning trade. ANZ shares fell 8.7% on Friday to $17.75 and have tumbled 10.4% to $15.91 this morning. Commonwealth Bank shares have dropped 4.6% this morning and Westpac shares have slipped 4.7%.

So what’s going on here?

First, it’s important to note that the reasons for the NAB writedowns and the ANZ provisions are very different.

The ANZ provisions come in two chunks. There is $375 million in general provisions related to the ongoing credit crisis and the softening economy in Australia and New Zealand, and $850 million in individual provisions related to ANZ’s exposure to specific companies, such as the collapsed payments company Bill Express.

The NAB writedowns related to the bank’s investments in US mortgages via vehicles called CDOs (collateralised debt obligations). With the US housing market in freefall, it has become harder and harder for US banks to get a return from the home loans.

NAB chief executive John Stewart claimed on Friday that when a US bank repossess a home and tries to sell it, they are only getting back about 45% of the value of the loan. Given this, NAB decided to take the position that its CDO investments are basically worth nothing and made its $830 million writedowns.

How will this hit entrepreneurs?

Both of these announcements emphasise that the credit crisis is far from over and, if US banks take NAB’s lead and start writing the value of their mortgage investments down further, could even get worse.

For Australian entrepreneurs, it is going to get even harder to get a loan from a bank – particularly if you are a younger company operating in the most exposed sectors, such as property and financial services.

The interest rates charged on SME loans could also rise as the banks try to protect their profitability.

Any other impacts?

Share prices in the banking sector are also likely to continue to slide in the next few months as investors look to park their money somewhere safer. That’s bad news if you have bank stocks in your portfolio, but even if you don’t, you can almost guarantee your super fund will have investments in some if not all the major banks.

The other concern is just how long the US economy could be in a downturn. Slow US growth means slow global growth, which will almost certainly prolong any Australian downturn.

What can I do about it?

Give your bank manager a call today and let him know how well your company is going and how you’re adapting to slowing market conditions. You’re going to need him on your side if you want some help in the next 12 months.

Read more on strategies for the downturn