Aggrieved Does Not Begin To Explain It

Sydney Morning Herald

Friday November 14, 2008

Elizabeth Knight

Until now Australian banks, the Federal Government and the regulators have been extremely busy patting themselves on the back for the relative health of the local banking system and how their prudent lending policies have allowed them to avoid the calamities befalling the US and Europe.

This is true. We are not encountering any systemic risk from previous unfettered lending sprees. But yesterday a lone analyst posed the question to the Commonwealth Bank management that many have been silently pondering for a while: Why, over the past year, did all the big banks increase or extend existing loans to ABC Learning Centres?

As the JP Morgan analyst pointed out, this company had negative net tangible assets and negative cash flow in the last December quarter.

If any corporate had the hallmarks of an aggressive and unsustainable model it was ABC. Around investment circles, ABC's crocodile boot-wearing chief executive from Queensland, Eddy Groves, was commonly referred to as "Fast Eddy".

This was not a property group like Centro, which grew too fast and took on too much debt in the wrong market. This was a company with a set of accounts that had warning lights flashing everywhere. And that was the good set. The bad ones - which we will probably never see - would be a lot worse.

So came the question about why all these warning signs were ignored. Sadly, there was no comforting answer from the CommBank boss, Ralph Norris, other than that he felt aggrieved.

The other three big banks are also on the hook for ABC Learning, but their exposure was not as great.

ABC is the banking sector's biggest embarrassment. It is also the clearest sign yet that over the past few years our supposedly conservative banks caved in to pressure to lend to big business, and in doing so allowed their risk levels to be compromised.

The second most contentious position taken was in Allco Finance Group and its various subsidiaries.

This is a company that would probably still be standing had we not had a credit crisis. But even if the environment had not changed, Allco must have been considered a higher-than-usual risk, with assets acquired at prices well beyond their value and related-party transactions.

Most of the big banks were exposed to Allco, too.

Now the pair of them are in administration. Their lenders, including the Commonwealth, will have to wear the impact on their profits of providing bad loans.

But that is one side of the ledger. On the other side the public has ploughed money into the deposit vaults of the Commonwealth, in particular, at astounding rates because it is regarded as a safe haven. Consequently, the bank has leapt ahead in market share.

Some of the growth has come at the expense of non-bank deposit takers; some of it is has come as the public leaves smaller banks, perceiving them as less secure.

And thanks to the Federal Government's decision to guarantee bank deposits, this trend in market share will probably continue for a while. It is a great source of capital for banks because it reduces their reliance on expensive wholesale funding - a very prominent silver lining to the financial crisis.

Norris, like other bank bosses, says that the banking environment will continue to be tough for a while. He says we may see some more one-off corporate losses, too, although he thinks the worst will be accounted for in the current half. (We probably know where they are.)

He also thinks we can avoid a recession in Australia and unemployment will not move much above 6.5 per cent. This view is held throughout the industry - or at least it's the view they're all pushing.

It runs in the face of mounting evidence from all the economic indicators, which are moving in the other direction.

But one can understand why the bankers are sticking to this view. Unemployment is the nemesis of banks because people without a job can't meet their loan repayments.

ABC, Allco and even Centro, if it were to go, along with a few finance companies, may not represent a systemic problem, but a sharply rising unemployment rate does.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home