ANZ, CBA face debt risk as energy producers wilt

Australian Financial Review Apr 21 2016 12:00 AM

Perry Williams

 

ANZ Banking Group and the Commonwealth Bank of Australia could be at risk of taking further resources-related impairments on their loan books, with a report saying oil and gas companies remain highly exposed to high-yield debt.

ANZ and CBA were both named by Bernstein Research among a list of global banks that could prove vulnerable to a further correction in the energy sector as it grapples with enduring low oil prices.

The broker estimates companies could default on up to $US70 billion ($90 billion) in high-yield debt by 2019, despite a recent recovery in the West Texas Intermediate oil price above $US40 a barrel from $US26 a barrel in January.

"$US459 billion of high-yield energy debt represents a substantial creditor to energy and oil service companies, and a substantial debtor to banks and the bond markets," said Bernstein analyst Nicholas Green. "The fact that $US345 billion, or 75 per cent, of this was issued between 2010 and 2014 under high oil prices raises further concern."

 

ANZ has $1.18 billion of high-yield debt in exploration and production companies, according to Bernstein, while CBA has $907 million in debt owing to the same segment of the energy sector.

ANZ also has a further $1.23 billion of debt outstanding to national oil companies, generally defined as being either fully or majority owned by national governments. 

While the Australian banks' exposure is at the lower end of the spectrum (Netherlands-based ING has lent $US9.3 billion of debt to national oil companies), it serves as a reminder to investors that ongoing commodity price weakness could lead to further losses for the banks.

Macquarie has noted that choppy conditions in both energy and mining markets were likely to translate into higher losses for the sector, with ANZ and CBA, with loans worth about $20 billion each, most exposed. 

 

According to Macquarie analysis, ANZ had the highest exposure to sub-investment grade and BBB-rated lenders in its mining portfolio.

The bank took a $100 million impairment on its loan book in March, attributing the lift to soured loans in the resources sector.

The cause for the downgrade was "a small number of Australian and multinational resources-related exposures", it said.

It is understood this includes loans to troubled steelmaker Arrium and United States coal miner Peabody Energy, which has said it may be forced to file for bankruptcy.  

"This is a challenging part of the cycle for these customers, with implications for the banking sector as individual circumstances evolve," ANZ's acting chief financial officer Graham Hodges said in March.

"We are continuing to monitor ANZ's exposures carefully and we will keep investors up to date with any changes to the credit outlook."

CBA has previously said its $11.9 billion in loans to the oil and gas sector are to high-quality, low-cost producers.

However, UBS analyst Jonathan Mott noted that "it is likely that some losses will eventuate from this portfolio", pointing to the bank's possible small exposure to First Oil in the North Sea, which recently entered bankruptcy protection in the UK. 

Westpac kicks off the first-half reporting season on Monday, May 2, followed by ANZ on Tuesday, May 3, NAB on Thursday, May 5, and Macquarie Group on Friday, May 6. CBA will provide a third-quarter trading update on Monday, May 9.

ANZ and CBA declined to comment.