Big Banks Face $5.5b Risky Debt Exposure

Sydney Morning Herald

Friday February 15, 2008

Danny John

THE country's leading banks are thought to have an exposure of almost $5.5 billion to five of the most debt-laden and financially troubled companies, in a sign of the growing pressures corporate borrowers are placing on lenders.

With the Commonwealth Bank still reeling from the market's reaction to the impact of increased bad debt provisions on its first-half profits, new estimates from industry analysts underlined the fallout from a potential loan failure by one or more of the prominent businesses.

The list includes Centro Property Group, which will unveil a short-term financing lifeline from its banks today, the fund manager MFS, the US mortgage lender Countrywide Financial, the investment combine Allco Finance and its offshoot Allco Principals Trust.

Of the $5.45 billion lent to those companies, Commonwealth has provided the most money, $1.7 billion.

National Australia Bank is next in line at $1.6 billion, followed by ANZ ($1.35 billion), St George ($500 million) and Westpac ($300 million), research by the brokers UBS shows.

While the list does not imply either a loss by the banks or a default by the companies, it nonetheless indicates the size of debt problems facing the lenders, having seen what were considered to be financially strong borrowers suddenly crumble in the face of the global credit crisis.

Australian and international banks have lent a total of $9.6 billion to the five companies involved, of which the biggest sum, $6 billion, is owed by Centro, Australia's second-largest shopping centre owner.

Commonwealth's decision to lift the amount it sets aside to cover corporate bad debts by $138 million set alarm bells ringing among investors, who on Wednesday sent the bank's share price plunging by 6.5 per cent to $46.20 in response to its disappointing $2.38 billion profit result.

While analysts said the sharp falls were overdone given the underlying strength of the bank's main operations, they indicated the Commonwealth had been late in raising its debt provisions and had now fallen into line with its rivals, which had made their increases last year.

Shares in the four other big banks all recovered strongly yesterday, regaining as much as half of Wednesday's dramatic losses.

In contrast, CommBank clawed back just 85c of its fall to close at $47.05, a rise of 1.8 per cent.

Analysts have slightly reduced their earnings forecasts for the Commonwealth Bank for the current year. As for the other banks, Goldman Sachs JBWere said that exposure to the bad debt problems of individual sizeable companies - resulting from higher financing costs - remained the "wild card".

Such problems are set to continue for many months to come, as underlined yesterday by yet a further increase in the three-month cash borrowing rate to 7.81 per cent, a 12-year high.

© 2008 Sydney Morning Herald

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