Bank bosses unruffled by property exposures

Chief executives of the four major banks in New Zealand and Australia are relaxed about a potential escalation in loan losses arising from a mountain of commercial property exposures, despite warnings by analysts of a tough refinancing round these borrowers in 2010.

The big four banks have largely deferred provisioning on declining commercial property values, which has yet to work its way through the system, CLSA banking analyst Brian Johnson warned in a recent client note.

Commercial property valuations in Australia have fallen by about 50 per cent since the start of the global financial crisis.

While many large, listed companies have already refinanced, recapitalised or failed, risks still remain for smaller, unlisted businesses who have yet to refinance in a rising interest rate environment.

"Some of these companies had credit maturities out to three years meaning there are some yet to face an extremely challenging refinancing round," Johnson said.

Unlisted property companies have about $100 billion of debt but limited access to fresh equity, he added.

ANZ Banking Group chief executive Mike Smith said the worst of the crisis was over with the equity markets having taken the brunt of the pain, particularly for listed companies.

But he agreed that the private sector was still problematic.

"I think the private sector has still got issues but there is a lot of liquidity around, a lot of interest in those sort of assets," he said on Friday. "So I think that whilst [commercial property] was a problem six months ago it's becoming less of one."

Falling commercial property values and a huge refinancing overhang remained issues in the US, Europe and China, he added.

Of the major banks, National Australia Bank (NAB) has the highest exposure to the sector, with commercial property comprising 17.1 per cent of its loan book.

Westpac Banking has the second biggest exposure, with commercial property making up 10.9 per cent of its loan book, while both ANZ and Commonwealth Bank of Australia (CBA) have a 7.8 per cent exposure to the sector.

Westpac chairman Ted Evans told AAP last week emphatically that a further drop in commercial property values posed no risk for the bank.

"On our judgment, the worst of that is over as far as our book is concerned," he said.

Likewise CBA chief executive Ralph Norris said it was not a major issue for the banking sector "at this stage".

But Johnson said the banks had waived covenant breach clauses on troubled property companies in return for directly accessing their cashflow, usually reserved to cover interest payments.

NAB was the only big bank to hold back on declaring that bad debts had peaked when the majors reported their full year 2009 earnings in October and November.

Johnson said its high commercial property exposure meant its loan losses would not decline as quickly as its peers.

- AAP