Australia's major banks are expected to see debt provisions - largely related to the US subprime mortgage crisis - almost triple to $A6.6 billion next year, but are better placed than US counterparts to weather the mortgage storm and ensuing credit crunch.
Increasing concern was highlighted recently when the ANZ in Australia announced the potential for a 25% profit decline, after saying it has made provision for a $NZ1.56 billion bad debt in the second half of the year, following hard on the heels of a similar National Australia Bank provisioning for $A830 million a week earlier.
Research by broker ABN Amro Craigs, says whatever fallout the major Australian banks must absorb will impact on their New Zealand subsidiaries, in the form of higher mortgage rates, tightening credit criteria and lower fixed-term interest rates to maintain shrinking profit margins.
Of the "big four" Australian banks, Westpac has its New Zealand presence, the Commonwealth Bank owns the ASB, the ANZ has the ANZ and National Bank and the National Australia Bank has the BNZ - the cornerstone of both economies.
ABN has forecast debt provisioning of the four majors will increase from $A2.3 billion last year by 186% to $6.6 billion this year and $A7.7 billion next year.
ABN broker Peter McIntyre believes the global credit crunch is only 50% of the way through its cycle and there is more bad news to come.
"Most banks are trying to be prudent but we would not be surprised if there is further provisioning announced by all four banks during the next 12 months, beyond the $6.6 billion already forecast," Mr McIntyre said yesterday.
In a separate report recently, the International Monetary Fund estimated $US400 billion had been written off so far and reiterated an earlier estimate the total losses would eventually amount to $US945 billion.
Major mortgage lenders and banks in the US have sought bail-out provisions from the US Federal Reserve, which has stepped up to give some assurance to markets shaken and made anxious by the losses, estimated to be trillions of US dollars by some.
Late last week, the Federal Reserve extended its emergency lending programme from September to January 2009 for investment firms aimed at keeping credit flowing in the financial system - "in light of continued fragile circumstances in financial markets," AFP reported.
The programme was implemented after the collapse of Wall Street giant Bear Stearns, which faced a cash squeeze after being unable to borrow in private markets to fund operations.
The Fed also announced a new longer-term loan programme for banks under its term auction facility implemented last year to help depository institutions get liquidity without resorting to the Fed's discount window.
The banks will be able to obtain loans for up to 84 days, up from the current 28 days.
Mr McIntyre said the Australian, and therefore New Zealand banks too, would not take the big hits dished out to the US banks because the American system had been using the securitisation, collateralised debt obligations and subprime type of packages for almost 50 years and their exposure was deeper and more complex.
Australia had been entwined in securitisation deals for barely 15 years and its banks would remain in profit, as opposed to widespread declines or losses in the US.
In the US, the low-interest subprime mortgages, to people with low credit ratings, came off their initial teaser terms at the same time as a housing downturn, which saw record numbers of home owners walk off their properties, which the banks had to sell on a falling market.
The return of keys to banks spawned the "jingle mail" term in the US.
The ensuing subprime crisis prompted the global credit crunch as both banks and investors became risk-averse to lending, which propelled interest rates skyward.
Mr McIntyre said the Australian banks' equity ranged from $A17 billion to $A29 billion, and assets from $A374 billion to $A565 billion, which allowed them to cope with further bad debt provisioning, if necessary.
The Australian and New Zealand banks, while being squeezed to find new money to borrow, were not having problems raising new capital and Mr McIntyre expected a slew of capital raising to begin from debt and equity issues and share placements.
He expected the major banks would also begin to move into the vacuum of the high-end lending of the finance company sector, which has been hard hit, with more than 25 companies in trouble or freezing payouts of $4.5 billion in New Zealand during the past two years.
The ASB said it had no direct exposure to the US subprime mortgage market or related collateralised debt obligations and funded more than half its lending from local savings and investments.
"As the economy emerges out of a benign credit cycle, increases in debt provisions are inevitable, but in ASB's case any losses are expected to remain relatively low," managing director Hugh Burrett told NZPA.
Peter McIntyre
