Bank profits 'destroyed' by bad debts

Photo / Michael Craig

Profits for the big four Australian-owned banks were "obliterated" last year by massive bad debt charges and multibillion-dollar tax settlements, says PricewaterhouseCoopers.

However the banks have come through the recession in better shape than expected, PwC said.

The big four are National Australia Bank, which operates BNZ in New Zealand, Commonwealth Bank, which operates ASB, Westpac, and ANZ, which operates ANZ and National banks.

A factor in the banks' resilience, according to the accountancy firm's latest analysis of the banking sector, is that bad debt charges on their major local exposures - loans to households - have remained relatively modest.

In the report released yesterday, PwC notes the banks performed credibly during the first half of last year, but were "hit for six" during the second half as lower interest rates reduced income and bad debt charges on loans to businesses skyrocketed.

"Combined with the provisions set aside by the banks to accrue for their potential exposure to the Inland Revenue arising from structured finance transactions, their statutory results for the second half were obliterated," PwC said.

However, PwC financial services partner Sam Shuttleworth said the banks' underlying earnings had been "pretty resilient".

"Their capital bases have remained very strong through careful efforts. In light of bad debt charges going through the roof and the tax cases, to come out effectively flat for the year isn't too bad. It could have been a hell of a lot worse."

Shuttleworth said the bad debt charges were "mostly on the corporate side of things".

"The thing with corporate exposures is it only takes one or two large write-offs to occur to lift the bar. It does skew the numbers."

Bad debt charges on household loans, mostly mortgages, were not as bad as anticipated.

"Sure they're ticking up but the low interest rate environment and lower than expected job losses have counteracted what the expectations were for the year. The issue for the household sector is whether this is going to be a 'W'-shaped recovery with another correction yet to come. All indicators suggest things are improving but it only takes one or two events and that changes."

Shuttleworth said the banks were expected to report further bad loan losses this year, with the rural sector being under particular scrutiny as interest rates rose. However there was some hope that growth in bad debt charges had now peaked.

But beyond the economic outlook and considerable pending regulatory changes, PwC said the challenge for New Zealand banks "will be to harness sufficient debt and equity to fund the investment requirements of the New Zealand economy".

The Australian parent banks had other competing demands including funding the investment needs of the Australian economy, and deploying resources to investments perceived as having higher potential returns such as wealth management and even Asian investment opportunities.

"These demands could constrain the New Zealand banks' capital demands and ultimately lending growth," said PwC.

The report also notes the risk that "lower returning assets could be divested". Shuttleworth would not rule out the possibility of divestment of local operations by one of the big Australian banks.

"My feeling is they're not going to pull out or let New Zealand go, however they will need to consider where their dollars are going."

HIT FOR SIX

Aggregated results of New Zealand's four major banks:

* A statutory loss of $1.4 billion for the second half of 2009 against a profit of $1.3 billion during the first half.
* A loss of $76 million for full-year 2009 against a $2.95 billion profit during 2008.
* Bad debt charges rose to $1.27 billion in the second half.
* Over the full year, bad debt charges rose by $1.5 billion to $2.1 billion.
* Two-thirds of bad debt charges were on loans to businesses.
* The big four settled their tax dispute with the IRD, agreeing to pay a combined amount of $2.2 billion.