Insolvencies concentrated in the leading edge industries of transport and construction, while on low side, will be ringing alarm bells for banks.
The industry this weekend is on the cusp of tense (and maybe tenuous) decisions by boards of listed and unlisted banks on the appropriate level of provisions – and thus the bad debt charge to the P&L; soaring thanks to the pandemic.
“The economy might be closer to the downside scenario than it was a few weeks ago,” Wayne Byres, the APRA chief, told a tame hearing of the House Economics Committee yesterday.
Managing and rescuing the bloated A$270 billion book of loans deferred (roughly 10 per cent of the industry’s total loans) and the attendant “hardship [will] take quite some time” for the industry to work through, John Lonsdale, APRA’s deputy chair, told Labor’s Anne Aly.
In prepared remarks, Byres used direct language: “Experience in Australia and elsewhere tells us that when the broader economy encounters severe stress, so does the financial system.”
As auditors, finance teams and overworked boards argue the ins and outs of reaching wise conclusions around the ever-more-hopeless state of asset quality in Australian banking, the most experienced in the room may lean on familiar trends popping out of the latest ASIC and ASFA data on insolvencies.
The Australian Financial Security Authority’s fortnightly data shows that of the 508 people that faced facts and went bankrupt in the last two weeks of July, the most common industries they worked in were: health care and social assistance; construction; and transport, postal and warehousing.
ASIC’s monthly insolvency statistics (which are up to date as at end June) confirm construction and transport as prominent industries when business owners throw in their corona-soaked towels.
These two industries represented 22 per cent of the 1203 business failures recorded by ASIC over the June quarter, and in some ways this no extreme number; save for the fact that this industry pair are a hallmark of each worsening credit cycle.
The unusual angle in the ASIC receivership data is the low numbers overall, considering the Covid pandemic and banks’ willingness (so far) to place seven per cent of all business loans in forbearance.
Over the 2020 financial year, 7262 firms entered administration, and this is around 90 per cent of the number in FY2019.
And in the June quarter, only 1203 firms expired, so the run-rate is half that of last year.
On ABA data “the value of SME loan repayments on deferral dropping by more than $686 million in June”, not that an APRA overview released on Tuesday supports that.
On the consumer side there is evidence that the sturdy habits of responsible borrowers are muting the worst.
“The number of borrowers needing hardship arrangements has fallen steadily from mid-June and is now about 10 per cent down from its peak,” Kim Cannon managing director of Firstmac said yesterday.
Firstmac is the largest non-bank lender in Australia and the sole mortgage funder willing to share data on gross arrears in its $13 billion mortgage book.
Gross arrears (30 days plus, the industry standard )at Firstmac