Are resources the canary in the banking mine?

Plenty has been said about the increased bad and doubtful debt (BDD) provisioning from ANZ on the back of its exposure to Peabody and Arrium.

Source: Bloomberg

Westpac has also laid the groundwork for increasing its BDD provision on consumer exposure. So how exposed are the Big Four?

The ‘big’ exposures:

  • Resource and energy represent approximately 1.5% of total bank exposures.
  • Over the past five and half years, US$62 billion has been lent out in syndicated loans. This is where the problem really lies and is approximately 22% of the total syndicate loans the Big Four participated in over this period.
  • ANZ’s exposure to resource syndicate loans is $27 billion, which is 24% of its syndicate exposure. WBC has the lowest with $9 billion.
  • The ‘risk exposed’ recourse syndicate debt is about 25%. This is based on resource firms that have a net debt-to-equity that would be described as ‘high’ and where free-cash-flow is either just or not covering interest repayments. Again, ANZ has the highest level of exposure to this group.
  • BDD at the end of financial year 2015 was one of the lowest levels in the post-GFC era and has helped drive share prices. However, there were signs that BDD charges were beginning to turn at the end of FY15 as the iron ore price and crude prices begun to crash.
  • NAB, Westpac and ANZ are due to report half year FY16 numbers at the end of April/beginning of May. Expectations would be for NAB to join WBC and ANZ in ‘confessing’, its provisioning for BDD will have to increase based on current information from resource firms.
  • The unknown is the exposure to service related syndicate loan debt. WBC’s admittance it’s provisioning in its ‘consumer and business related lending’ sector is set to increase gives rise to the prospect of further one-off write offs and BDD increases across the Big Four group.

The clear examples here are the syndicate loans provided to Dick Smith and Slater and Gordon. The impacts are not yet clear due to the ongoing audits, however NAB has the biggest exposures to these names. The confessions are growing by the day.

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