Many See The Bad Debt Arising

The Age

Saturday April 12, 2008

Eli Greenblat

Other banks will follow ANZ's lead and increase their provisions, writes Eli Greenblat.

AS FORMER US secretary of defence Donald Rumsfeld correctly pointed out, it's the "unknown unknowns" that keep the experts awake at night worrying about the next shock to the economic or political system.

Such is the case with the growing level of bad debts held by Australia's biggest banks, and the uneasy feeling among fund managers and analysts that hundreds of highly leveraged borrowers - particularly in the property sector - could soon implode, taking bank balance sheets with them.

They point out that ANZ's admission this week of $1 billion in provisions for the six months to March 31 was in part driven by high-profile blow-ups such as Centro and Hedley Leisure & Gaming Property Fund.

But what are the business collapses we don't know about?

"This is the whole problem, people are unfortunately poking at shadows," said Tom Elliott, managing director of MM&E Capital.

"They won't be the listed ones, because we would have heard about them if they were listed, but they will be umpteen unlisted small to medium commercial and industrial property developers who are overstretched, trying to complete projects and haven't been able to sell them."

Mr Elliott warned last month that leading financial institutions might face a second wave of bad debts totalling hundreds of millions of dollars, as shaky property developers and embattled companies buckled under the weight of the subprime credit crisis.

Forward to Monday, and ANZ became the first bank to admit it had a bad-debt problem.

Mr Elliott said: "The banks tend to do things together, so once one of them does it - whether it's an interest rate increase or in this case drinking a bit of truth serum - the other ones will do it."

Worse news for the banks, and their shareholders, is that as they scramble to retrieve money from property companies and close out their bad debts, the value of those assets are quickly falling.

This week in Melbourne, vendors attempted to sell 10 quality Macquarie CountryWide Retail Trust supermarkets leased to Woolworths and Coles. Despite a crowd of 150, made up of fund managers, retail and wholesale investors, and high net-worth individuals, only two properties sold. The others were either passed in on a vendor bid or registered no bid.

"There was no apparent reason why these other predominantly regional properties failed to sell as their strong lease covenants are normally considered AAA in the retail market," said Greville Pabst, chief executive of WBP Property Group.

"The obvious credit crunch, combined with low retail investor sentiment, appeared to be the major stumbling block."

Mr Elliott said all the banks tended to lend to the same clients as ANZ did. If people who had placed deposits on properties under construction decided to walk away from the deal rather than buy the depreciating asset, it could send many property developers to the wall.

"Some people think Westpac will be the next bank to go, simply because (chief executive) Gail Kelly is new there and, as far as her own reputation goes, can afford to get the broom out."

Forecasts by leading bank analysts suggest that Westpac's "bad and doubtful" debts for this year could grow from $482 million last year to nearly $700 million, up 45%. NAB and CBA's levels of bad debt were expected to increase by more than 40% and St George by more than 30%.

Mr Pabst, a property valuer by training, said the banks were trying to reduce their exposure to property to prevent further bad debts.

"Twelve months ago, professional investors would be able to walk into a bank and say, 'I'm buying a supermarket with a 10-year lease', and walk out of the door with 80% of the funds.

"Inquiries that I've made (shows that) these qualified investors are now only being offered 65% to 70% lending ratio, and that's significant because what that means is that these investors now have to put their hand in their pocket and come up with that equity themselves."

He said this was an indication that banks were getting "ahead of the game".

Frank Gooch, chief executive of listed investment company Milton Corporation, said the increase in bad debts would most likely not be driven by residential investor mortgages but more by large institutional loan books.

"We know most or all of the major banks have some exposure to some of these big single-names clients, the ones that have caused problems for ANZ," he said.

"ANZ have effectively led the charge in disclosing the sorts of provisions they will need to make this half and I would expect that if the other banks have similar concerns, then they should be making disclosures fairly shortly."

ANZ is expected to report its interim results for the period ended March 31 on April 23. Westpac will release its half-year financ0ial results on May 1 and NAB will report its interim results on May 9.

© 2008 The Age

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