What lies behind the bank headline results? Assessing the credit landscape

  • By Patrick Coghlan

CreditorWatch CEO Pat Coghlan pinpoints what the industry does not know about the Australian credit landscape – but should

Each month we publish our Small Business Risk Review, which is based on payment data that’s unique to CreditorWatch.

This research looks across individual industry sectors and assesses how payment times are changing on an annual basis.

Our July figures indicate of all sectors, payment times for financial services have deteriorated the most year-on-year, with payment times increasing by a colossal 500 per cent in July this year compared to July 2019.

This data, which typically acts as a canary in the coal mine, indicates smaller financial services firms are under pressure. Over time, this is likely to put pressure on the bigger banks.

We are not yet seeing this data show up in bigger financial institutions’ numbers. So far this reporting season, the nation's biggest banks’ financial results indicate they are performing better than they thought they would be at this stage of the pandemic.

At CBA’s full year it reported cash net profit of $7.3 billion, down just 11.3 per cent compared to the previous year’s results. While Westpac announced unaudited statutory profit of $1.12 billion for its third quarter and NAB announced unaudited cash earnings of $1.55 billion.

Unsecured lending is one of the only trouble spots for the big banks.

It’s likely this will continue to trend down as incentives such as JobKeeper as well as other federal and state initiatives, which are propping up small businesses, come to an end.  

After financial services, transport, postal and warehousing is the second-worst performing industry sector, with payment times rising by 429.4 per cent year-on-year.

This is followed by the information, media and telecommunications sectors, where payment times have risen by 400 per cent.

Mining is the exception to the rule, with payment times improving by 42.9 per cent year-on-year.

This has implications for the financial services sector as banks are likely to bear the brunt of the inundation of insolvencies that are likely to be just around the corner.

As this result indicates, there’s been continued strong demand for Australian resources, which is fantastic because it’s such a big part of the economy.

Grinding the gears

Where once we talked about a two-speed economy between the mining and non-mining states, the latest payments data shows Australia now has a multi-speed economy.

States such as Western Australia and Queensland are moving ahead, while economic conditions in Victoria are extremely soft.

Other states such as NSW, South Australia and Tasmania are somewhere in the middle.

Across the board, our trade payments data indicates there’s been a slight improvement between June and July across the country.

But almost all industries have experienced a significant deterioration compared to the same time last year.

This has implications for the financial services sector as banks are likely to bear the brunt of the inundation of insolvencies that are likely to be just around the corner.

The safe harbour provisions are artificially propping up some businesses that would otherwise have fallen into liquidation in more normal times.

These are rules introduced at the start of the pandemic that amended the Corporations Act that allow businesses that were otherwise solvent prior to the crisis to continue trading.

Deloitte Access Economics’ data paints a particularly grim picture.

It estimates 240,000 or 10 per cent of all businesses are at risk of failing in September.

The directors of these businesses are unlikely to risk trading while insolvent. So once the COVID-induced insolvency rules revert to normal on 25 September, it’s likely an avalanche of businesses will opt for voluntary administration or become subject to creditor-initiated wind-up.

There’s potential for the federal government to extend the safe harbour provisions and support a soft landing.

So far Treasury has not provided any guidance about this.

It’s possible the government is waiting to see what impact the lockdown in Victoria has had on business before determining whether these provisions should be amended, finalised or extended.

Worryingly, the safe harbour provisions mean creditors and suppliers are trying to collect their debts with one hand behind their back because they are unable to take debtors to court.

At the same time, debtors feel they can trade insolvent legally. Some are simply not paying bills because creditors have no power to pursue them.

It’s unwise to act in this manner and keeping the safe harbour provision in place for too long risks forcing a second wave of businesses going out of business because they cannot collect their receivables.

How the government manages changes to the insolvency safe harbour legislation will be key.

It will be almost impossible to allow these provisions to continue in some states – for instance Victoria – but not others.

Looking ahead

While the results of our Small Business Risk Review are sobering, moves by government to gradually taper off initiatives to stimulate the economy may help to soften COVID’s economic blow.

We'll get a better feel for this from October onwards when the JobKeeper payments reduce and become means tested.

This may flatten the insolvency curve, which is really important in supporting the overall economy.

All this may sound bleak. But there is positive news. Despite the RBA’s most recent bulletin indicating slack demand for credit, our data shows trade credit applications are back at pre-COVID levels.

This indicates many businesses are still trading and offering creditors payment terms. In fact, after an initial shock and notwithstanding the effect of the Victorian lockdown, the volume of trade credit applications has steadily grown throughout COVID.

This demonstrates businesses are learning to trade during a recession and pandemic.

This is good news. Because while it’s tempting for businesses to bury their heads in the sand, this is unproductive.

We have to get on with it to support the Australian economy through the rest of the pandemic and beyond.