Business credit from Authorized Deposit-taking Institutions (ADI) in Australia has witnessed double-digit growth despite underlying business credit demand being muted, notes Citi.
Craig Williams and team at Citi in their April 17, 2015 research note titled: “Australian Banks – Can the surge be maintained?” point out that business loan quality, however, looks to have troughed.
Growth in business loans in Australia
The Citi analysts point out that in the 12-months to February 2015, business credit growth has picked up, with APRA recording ADI business credit growth of 10.1%. However, more recently, business loan growth as measured by RBA Aggregates was significantly weaker than the APRA measures. The analysts note this has largely been driven by new securitization / other SPVs being established and utilized rather than a material ceding of share by money market corporations / finance companies. They highlight that as a leading indicator, a step change in the average monthly business lending commitments in the year to June 2014 has begun to translate into higher credit growth:
Williams et al. also note banks and other ADIs are winning share from non-ADI finance companies. Thus, ADIs grew 10.1% compared to 5.3% growth by total system.
Moreover, debt issuance peaked in 2013, with the share of debt markets issuance declining as ADIs gain share of business lending:
High gearing contributing to credit growth
Williams and colleagues also point out that the recent business credit growth was primarily driven by balance sheet restructuring and the resultant higher gearing levels. They also highlight that underlying drivers remain weak, as non-mining capex, falling stock levels and M&A deal completions all looking relatively anemic.
The analysts note with business profitability relatively flat over the past 3 years, there has been little underlying capacity to borrow. They point out that in the three years to June 2014, net debt has grown at 9.9% CAGR at Non-Financial Companies, while corporate earnings are flat. This leads then to question the longer term sustainability of any recovery in business credit whilst other drivers remain weak.
The Citi report notes that Westpac and Commonwealth Bank of Australia have grown fastest in business lending in the year to February 2015. Moreover, foreign banks have been active within the business lending market and continue to grow at above-system levels:
As set forth in the following graph, the analysts note business lending quality continues to improve as the ratio of past due business loans continues to fall as a proportion of total business loan exposures. Moreover, ANZ and NAB have considerably de-risked their business lending portfolios, thanks to their offshore businesses:
The Citi team maintain their “Sell” on the major banks, and within this, their order of preference (most to least) remains – CBA, ANZ, WBC and NAB. The analysts have lowered CBA’s 12-month target to $80 from the current A$92.08. They believe the current ROE of 18.6% is set to decline to 18.1% as credit cost improvement will slow down and returns will contract in commercial banking.