Joye joins queue to take money from Sykes

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Chris Joye did some bank stress testing on Friday after Trevor Sykes’ recent sell at the paper:

A simple stress-test is to imagine that non-residential loan losses reach, say, two-thirds of their 1991 marks coupled with a rise in residential arrears to, say, 2 per cent (compared to 0.6 per cent presently) with 30 per cent loss severity. Given a 60/40 balance-sheet split between residential/business lending, total bad debt charges would jump from 0.16 per cent to 1.1 per cent. This is less than half the losses in 1992 and only 34 per cent above the majors’ 2009 experience.

All else being equal, every 0.1 percentage point increase in loan losses knocks about 5 per cent off the majors’ returns on equity (RoEs). So my stress-test would at least cut RoEs in half assuming no other adverse impacts (eg, weaker credit growth and margins), which of course there would be in spades. The point is that major bank profits hinge crucially on the macroeconomy’s performance, which could easily sour. Yet prevailing prices do not accommodate this possibility.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.