HFCs better placed than other NBFCs in terms of asset quality: Report

The sorry story of Australia’s Westpac is a testament to the difficulties that can arise for lenders in an environment of shrinking margins and rising leverage. The loan books of banks, particularly retail ones, are growing, but that growth is narrowing existing margins. At the same time, stretched investors are demanding ever higher returns from bank stocks, in the face of a slowing economy and the prospect of higher interest rates. In 2016, Australian Prime Minister Malcolm Turnbull famously described Westpac as being on the “age of entitlement.” Having grown more conservative in recent years, that sentiment certainly appears appropriate.

Westpac’s disclosure notes that its loans now represent 43 percent of its net worth, and that its capital position has fallen, owing in large part to asset sales to reduce leverage. In short, it can no longer be considered fully capitalized. Meanwhile, Westpac’s exposure to unsecured overdrafts and forbearance (the provisioning for loans not repaid) are significant. And, like all banks in the region, its earnings from corporate and commercial banking are under pressure, due in part to the weak performance of a significant Australian coal portfolio.

That probably explains why investors are dumping Westpac stock — it lost more than 10 percent of its value yesterday — even though its exposure to the home lending market is modest, and that it is also one of the two bigger investment banks in Australia (by market cap). The main channel of contagion from the Westpac issue appears to be to Commonwealth Bank of Australia, because in addition to having seen double-digit declines in its share price over the past two days, it too is unhealthily exposed to impaired mortgages, and as a result is having to raise capital.

CBA’s exposure to impaired mortgages compares with that of Bank of Queensland, a smaller, presumably healthier player, which has shares that are down more than 10 percent in the past two days.

The Global Financial Crisis can lead to new measures of prudence and rigorous record keeping in the banking industry. That may well happen in Australia. If it does, it probably won’t just be overdrafts and forbearance that are cut back.

Leave a Reply

Your email address will not be published. Required fields are marked *