Via Banking Day:
Macquarie Securities has reviewed the institutional loan portfolios of the major banks, using a number of quality screens to assess their strengths: the rate of growth in the lead-up to the downturn; the proportion of listed versus unlisted companies; the proportion of companies with credit ratings; the average credit rating across the portfolio; and offshore exposure.
Based on its analysis, Westpac’s institutional loan book is ranked ahead of its peers, followed by ANZ and Commonwealth Bank, with NAB having the lowest portfolio quality.
Macquarie says: “We expect banks to see a lower level of impairments relative to the GFC and forecast bad debt charges to peak to 105 basis points [for institutional loans], compared with 175 bps during the GFC.”
Macquarie says that despite the loosening of credit standards on institutional lending globally in recent years, the big Australian banks were less aggressive in chasing riskier institutional business relative to some of their international peers.
“The quality of their portfolios was sound going into the downturn,” it says.
The bank with the biggest institutional loan book growth over the three financial years to 2018/19 was ANZ, whose portfolio grew 14 per cent in total over the three years. NAB’s cumulative growth was 12 per cent and Westpac’s was flat.
CBA experienced an 18 per cent reduction in its institutional lending exposure over the three years, as it changed its business strategy.
Macquarie says all four banks have moved to the middle of the risk curve in recent years, increasing their exposures to BBB+ and BBB rated credits, while reducing exposures at both higher and lower investment grades.
Based on the credit ratings of the banks’ exposures, NAB has the highest probability of default.
Macquarie expects peak loss rates of around 170 bps in commercial real estate loan portfolios. In the listed space, property trusts are under pressure due to relatively high levels of gearing and challenging revenue outlooks.
ANZ has the lowest exposure to commercial real estate, at around 7 per cent of gross loans and acceptances, and NAB has the highest, at around 9 per cent (or $60 billion of loans).
“We expect losses to be elevated in high-risk sectors such as retail, hospitality, air travel and tourism, and energy. Based on banks’ recent disclosures, NAB has a higher level of exposure to those sectors, which coupled with its overweight position to commercial real estate is likely to result in a higher level of losses than peers.”
ANZ and Westpac have the biggest exposures to listed and/or rated companies, while NAB has the smallest.
The total shareholder returns of the listed companies in Westpac’s portfolio were highest, followed by NAB.
“We believe a higher exposure to listed and credit-rated segments generally signals a stronger credit quality,” Macquarie says.
The notion that defaults in SMEs will be lower than during the GFC is amusing.