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Bad debt charges to hit banks’ half year results
Significantly higher impairment charges will be a feature of the upcoming interim reporting season for three of the big banks and will continue to rise next financial year.
Macquarie Securities has issued a report on the banking sector, saying: “We now incorporate in our forecasts a credit cycle with impairment charges peaking at around 50 to 65 basis points. Losses will peak in 2020/21.”
The big banks’ impairment losses in 2018/19 averaged 14 bps of gross loans and acceptances (GLA). At the height of the global financial crisis, in 2009, the banks’ bad debt charges averaged 82 bps of GLA.
“If the economic recovery takes longer than expected and the unemployment rate remains elevated for a prolonged period, there is downside to our estimates,” Macquarie said.
It forecasts that ANZ and NAB will have the highest bad debt loss rates, both at 64 bps of gross loans and acceptances in 2020/21. Westpac’s loss rate will peak at 55 bps and Commonwealth Bank’s 52 bps.
Among the smaller banks, Macquarie forecasts that Bank of Queensland’s loss rate will rise to 54 bps n 2020/21 and Bendigo and Adelaide Bank’s will rise to 34 bps.
“In addition to elevated impairment charges, we expect the banks’ capital positions to be affected by risk-weighted asset inflation as credit quality deteriorates,” Macquarie said.
It said one of the critical issues for banks in the downturn is managing the impact of RWA inflation as impairment charges increase.
“While difficult to estimate, given these scenarios are untested, we estimate the majors could see RWA inflation of around 8 to 9 per cent over the next two to three years, equating to around 80 to 100 basis points off their CET1,” it said.
Macquarie expects dividend payments to fall by as much as 50 per cent and has downgraded its earnings forecasts, largely as a result of higher impairment charges.
ANZ. Macquarie expects ANZ to report an impairment charge of $1.4 billion for the March half, compared with $302 million for the previous corresponding period. ANZ’s impairment charge for the full year will be $3.4 billion, compared with $794 million in 2018/19, rising to $4.2 billion in 2020/21.
It expects the bank to report cash profit of $2.3 billion for the March half, down from $3.5 billion in the previous corresponding period, and $4.1 billion for the full year, down from $6.5 billion in 2018/19.
Macquarie’s forecast for ANZ’s full-year dividend payout is 80 cents a share, down from$1.60 a share in 2018/19.
Commonwealth Bank. Macquarie expects CBA to report an impairment charge of $2.4 billion for the full year, compared with $1.2 billion in the previous corresponding period. The impairment charge will rise to $4.2 billion in 2020/21.
It expects the bank to report cash profit of $7.9 billion for the year, compared with $8.5 billion in 2018/19.
Macquarie’s forecast for CBA’s full-year dividend payout is $3 a share, down from $4.31 a share in 2018/19.
NAB. The bank reported an impairment charge of $1.2 billion for the March half, compared with $449 million for the previous corresponding period. Macquarie expects that NAB’s impairment charge for the full year will come in around $3.2 billion, compared with $919 million in 2018/19, rising to $4.1 billion in 2020/21.
NAB reported cash profit of $1.4 billion for the March half, down from $2.9 billion in the previous corresponding period. Macquarie expects it to report a full-year profit of $3.6 billion for the full year, down from $5.1 billion in 2018/19.
Macquarie’s forecast for NAB’s full-year dividend payout of 65 cents a share, down from $1.66 a share in 2018/19.
Westpac. Macquarie expects Westpac to report an impairment charge of $1.4 billion for the March half, compared with $333 million in the previous corresponding period. Westpac’s impairment charge for the full year will come in around $3 billion, compared with $794 million in 2018/19, rising to $4.1 billion in 2020/21.
It expects the bank to report cash profit of $1.6 billion for the March half, down from $3.3 billion in the previous corresponding period, and $4.2 billion for the full year, down from $6.8 billion in 2018/19.
Macquarie’s forecast for Westpac’s full-year dividend payout is 65 cents a share, down from $1.74 a share in 2018/19.
