Aussie banks non-housing loan losses climb

More headwinds for bank earnings, from Morgan Stanley:

Higher than forecast loan losses in the June quarter: We believe reporting season has highlighted the downside risk to major banks’earnings from a deterioration in credit quality. Loan losses in the June quarter were ~7% higher than our forecast and did not fall relative to the 1H16 quarterly average, despite the non-recurrence of “single name” loan losses. We note that: ANZ’s charges rose due to specific provision top-ups; stressed exposures increased in 9 of 12 industry segments at WBC;new impaired assets increased ~20% h-o-h and troublesome exposures rose ~10% at CBA;and NAB boosted its mining and agriculture overlay.

Comparing the banks’ Australian non-housing loss rates: Our Chart of the Week shows our forecasts for the majors’ Australian non-housing loss rates. We expect them to rise from ~37bp in FY15 and ~49bp in 1H16 to an estimated ~66bp in FY17E. We highlight: (1) the last reported loss rates were ANZ 1H16: ~73bp, CBA 2H16: ~43bp, NAB 1H16: ~28bp,and WBC 1H16: ~66bp; (2) ANZ’s loss rate has been >50% higher than the peer average over the past 18 months,and our forecasts assume this remains the case; (3) NAB’s Australian loss rates fell from ~57bp in FY13(above CBA: ~54bp and WBC: ~42bp) to 31bp in FY15 as a result of de-risking,and our forecasts imply that it will be the “lowest risk” bank in FY17E with a loss rate of ~51bp vs the peer average of ~66bp; (4) WBC has suffered more than CBA and NAB from single name exposures in FY16E,and we conservatively assume that its loss rates will remain higher in FY17E. Overall, we see a higher probability of loan loss driven FY17E earnings downgrades at NAB than we do at ANZ or WBC.