High cash balances, strong profitability and low gearing put large Australian businesses in a good position heading into a likely downturn, according to a review of the credit quality of Australian banks’ corporate exposures.
Macquarie Securities has analysed the syndicated loan portfolios of the big banks to assess the risk of impairment they face from their corporate exposures if there is a recession.
The analysis found that banks’ corporate portfolio quality improved over the past two years as banks continued to reduce their offshore exposures. Macquarie’s analysis shows that offshore exposures exhibit “a considerably higher level of risk” relative to domestic books.
“This is partly driven by the banks’ weaker franchises in offshore markets,” Macquarie said.
Macquarie has also observed “positive credit rating migration” among the banks’ local corporate exposures.
“Over the previous two years, banks’ credit quality has improved, which in large part was driven by changes in credit ratings, rather than active changes in their risk profiles. Across the board, it appears that a substantial proportion of BBB+ rated companies moved into the A- category and BBB- into BBB,” Macquarie said.
Gearing in the corporate sector (non-financial business debt to financial assets) fell from a decade high of 0.7 times in 2016 to the current level of 0.5 times.
After an earnings slump at the start of the pandemic, corporate profits have been strong.
“We expect this to result in a lower level of losses across corporate portfolios than in previous downturns,” Macquarie said.
Macquarie said ANZ has a higher proportion of listed and credit-rated exposures, which Macquarie believes “signals a more robust credit quality”.
On the negative side, ANZ has an overweight position overseas, compared with the other big banks, and this could make it more vulnerable to rising impairments in its corporate book.
ANZ also has an overweight property developer portfolio, which increases its risk.
Macquarie said CBA’s book has had “the biggest positive shift” in recent years, although it is underweight listed and credit-rated companies, and overweight overseas exposures and commercial real estate.
NAB’s risk profile has remained steady over the past couple of years. It is underweight listed and credit-rated companies and overweight commercial real estate and private equity. It has increased its exposure to agriculture in recent years.
Westpac’s corporate portfolio “screens better than peers”, with a higher proportion of listed and credit-rated exposures. An overweight position in the discretionary consumer segment could presents risks.