A record spike in the level of bad debts held by Australia’s banks means their harsh treatment of business customers is far from over, a business restructuring expert has warned.
Cliff Sanderson, managing director of business consultancy Restructuring Works, says figures released late last week shows the level of bad debts held by Australia’s banks soared to $33.1 billion for the nine months to September 30, compared to an average annual rate of $4.4 billion between 1995 and 2008.
Sanderson says bad debt charges increased by around $7 billion in the September quarter, down from $10 billion in the June quarter of 2009.
“It’s another thumping number,” Sanderson says.
“I had expected material reductions in the last two quarters, particularly because insolvency figures just haven’t been rising as quickly as we thought. But these are huge numbers compared to the last decade.”
Sanderson thinks the high numbers bad debt are a result of the banks being conservative, but they also underline the fact that small and medium size businesses tend to be last into a downturn and last to emerge into the recovery.
He points out that insolvency figures after Australia’s last recession, which started in 1987, didn’t peak until 1991-92.
“History would say it takes a long time to filter through and that’s because if directors of small companies think that if there’s a chance of surviving, they’ll take it.”
Sanderson’s data also dispels any notion that banks may have tried to nurse struggling companies through the very worst of the downturn.
Banks took possession of 1,342 companies or assets in the 11 months to November 2009, which Sanderson says is almost triple the average of 523 from the previous five years.
But not all of these cases ended with the company or asset being put into the hands of a receiver. The number of “in-house” appointments by banks increased five-fold to 505 in the year to November, indicating a strong preference for banks to closely manage their own bad debts.
“There seems to have been this view that the banks have been nice – they haven’t,” Sanderson says.
And that trend is almost certain to continue. Sanderson expects banks will remain extremely aggressive about recovering debts and rising asset prices could give them the confidence to move in on a company and sell if it necessary.
“If the economy continues to recover, they will continue to recover their debts,” Sanderson says.
“I expect they’ll target that bottom 15% that is really struggling. If the rest of the world continues to improve, you can be tougher on the bottom ones. “
In contrast to the hard line taken by the banks, Sanderson says the ATO remains very sympathetic to struggling companies.
However, there are some signs the taxman’s generosity is coming to an end.
“We started to see a couple of the director penalty notices in November and December and I hadn’t seen any for the last six months. As soon as they start serving those, it invariably leads to appointments.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
