Banks warn worst still ahead for SMEs

In the past few days, the chief executives of NAB and ANZ have presented a dire warning for Australia’s small and medium business community – the worst of the recession still lies ahead.

Both NAB and ANZ’s profit results were dragged down by a sharp increase in provisions for bad and doubtful debts, which indicates the banks are bracing for an increase in the number of corporate collapses in the coming months.
Commonwealth Bank subsidiary BankWest, which reported its results yesterday, told a similar story; it posted a $139 million loss, with bad debt provisions soaring from $88 million to $825 million.
NAB chief executive Cameron Clyne and ANZ boss Mike Smith have both referred to the concept of “waves” of bad debts that hit the economy during recessionary periods.
Clyne and Smith argue there are three waves of collapses.
“The cycle comes in three stages,” Smith said. “The first is the big ticket, the larger end of town, and it picks on the business models that don’t work any more; they are the ones that are highly leveraged and high-profile names.”
“The second is the middle market, and the third is the small-to-medium enterprises and the consumer side of the economy, which is driven by unemployment, and that happens as a result of the first two stages.
“In good times badly run companies can make money, but right now they can’t. Good companies will still make money, but poor companies will hit the wall.”
So where are we in the wave cycle?
Smith and Clyne agree that we are through the first stage and only just entering the second – that is, SMEs are only just now starting to feel the pain. Smith said yesterday his bankers were shocked by how bad March was for their SME customers, although he did say April is proving to be slightly better.
There is plenty of evidence to back up Smith and Clyne’s theory that the second wave is only just beginning.
Yesterday’s survey of mid-sized companies by KMPG revealed businesses are still managing do everything they can to avoid cutting jobs by abandoning pay rises, reducing worker hours and forcing staff to take holidays.
But how long can this last? All the indicators point to the fact that things are still going to get worse.
NAB’s business conditions survey is at 20-year lows. Dun & Bradstreet has rated 130,000 companies as being at increased risk of failure, and 150,000 will have trouble paying bills on time. KMPG’s survey showed a third of companies are preparing to shed staff in the next six to 12 months. Worst of all, unemployment is forecast to increase another 50%.
Clyne and Smith look like they are on the money – the second wave is only just reaching the shore.