WA Perth is entering Boom cycle

sorry i don't understand...?

I always though impairment charges were 'goodwill'.

as in, the tenant in a commercial property has a solid lease with a short term expansion plan and proven market to sell/operate in, therefore the cost of the property is the cap rate plus some 'goodwill'.

are you saying there's goodwill to individual commercial mortgage borrowers? or resi mortgage borrowers?

 

Different definitions Aaron

Basically what happens in the banking world, esspecially on commercial loans is the bank first raises concerns about a borrowers ongoing capability to service debts and is placed on "credit watch" (varying degrees depending on the situation). This may or may not be a result of missed interest payment.
At this point the manager will raise the risk profile of the borrower, and he will make an assesment of the required provision if everything goes pear shaped. This number will continue to increase/decrease as the client is managed going forward.
The assessed loss is booked as a "provision". This is booked against the banks P&L as a loss (impairment). Albiet an actual cash loss is not yet experienced.
Once the client achieves getting out of the "credit watch" by either
A) Reducing debts (eg sale of non-income producing assets or other source of funds which doesnt impact operations)
B) Improving operating performance to the banks satisfaction
C) Providing additional Security to reduce LVR
D) refinancing

The bank can then 'recover' the provision and it is booked against the P&L as a profit.
Provisions are closely monitored. It is a very strong indication of the overall 'health' of the banks finance books.

It is also one of the major risks of commercial lending to borrowers.
In this instance, there are several players.
1) The 'client manager'. This is the guy who first books a provision and it hits his personal P&L - and thus impacts his bonus. He aims to keep the provision as low as possible.
2) the "credit guy" - this is the guy who recieves the file, his role is to recover as much of the debt as possible, any way possible, and is exceptionally risk adverse (and sometimes agressive) in getting the banks money back. Often has little patience to see the client through the hard times, and encourages asset sales, refinance, or any other method to recover funds.
He actually aims to place the provision as high as possible. If he succeeds in recovering more than the provision he made, the reversed provision hits his P&L, and he gets a big bonus.

So - The client manager logged a small provision and only hit is P&L a little bit and hands the file off to 'credit watch'. The Credit guy logs a much larger provision, and then recovers most of it - so gets a big profit to his account. Everyone wins... oh... except for the client who has been dragged through hell and back - and maybe lost his business/house/everything in the meantime. But hey, the shareholders are happy.

Blacky

*note - this is an overly simplified version of events. It is a very complex process, and often a client can be on "credit watch" for years before the bank pulls the rug from under them. Even once the rug is pulled, it can be years further before the client is bankrupted, insolvent, or 'out of the woods". The banks go to great lengths to avoid this situation.
There are many instances of the credit guys working through the clients financial issues with them, and getting them off the "watch list". Working in this department can be exceptionally miserable and stressful. Getting a client off watch list and back into the normal banking stream is one of the few highlights of an otherwise thankless job.

 

What suburbs?

 

Thanks so much for taking the time to explain that!!!!

 

hello - yes very good point , most exposed to bad debts imo are anz -> nab (albeit borderline) -> wbc -> cba , dominoes will fall in that order

 

great explanation of SoP

 

Many years ago our family business was stuck in this division at ANZ (hi Franke!)

It was one of the most demeaning and humiliating experiences of my life. Getting rid of ANZ at the time was wonderful.

I understand they have a job to do but wow. Admittedly Dad did not really help as he was quite confrontational in a few different ways.

 

CBA removes controversial loan clause

There has been a big push especially at the recent Senate Banking Inquiry, to remove the ability of Bank's to agressively target Smaller Loans that haven't yet missed payments. I assume this would restrict Bank's abilities to enforce certain convenants that come into play before a client has actually missed payments.

 

Depends which part of the economy starts to faulter, if it's property. I'd expect it might be WBC > CBA > NAB > ANZ.

 

Ross - I feel for you.
Touch wood, Ive never been on the recieving end however, I have sat on the other side of that desk more times than I care to remember (I was there during the GFC, when banks were taking a very concervative approach to business lending). I have seen most reactions from fear, anger and sadness - with most emotions being at the 'extreme' end of the spectrum. I certainly learned a lot of new insults.
Meetings with good intentions can very quickly turn sour when stress levels are already at tipping points.
None of mine, but I am aware of several suicides during the process.

In many ways I can see a market for a 'consultant' to help work with the bank - before getting to an insolvency point. However, the problem would be that quite often anyone in this position cant afford a consultant.

Blacky

 

What do you base this on?
I also presume you are referring to home loan exposures?

If the economy faulters, you will see accross the board increases in provisions/bad debt exposures.
Sure, some may increase more than others, but it is fairly impossible to say with any certainty which bank will be hit harder, as it is very sector and client specific.

Blacky

 

Not sure if this was posted yet but maybe a sign of things to change soon in WA:
'Landmark agreement': $2.3 billion boost for WA road and rail projects

 

I think often people need to be pushed to the brink before they will accept change. I have often seen deliberate ignorance so that people can keep operating in the same way.

I think Gordon Ramsays show where he changed the small restaurants is a classic example of how owners will not want to accept change. Admittedly Ramsey's style is horrible - but his credentials and reputation cannot be challenged and still these, bear bankrupt, operators still try and ignore him.

 

Curious while waiting for the good times in Perth do any Perthians look at investing in other States that are strong? Diversification saved my bacon many times



Mtr

 

I just allocate more to equities and cash. And some equity investments are direct property related.

I thought Sydney peaked in 2015 so there was no way I was going to buy then. And that lack of knowledge about other property markets is why I should only stick to my strengths.

I like the idea of investing interstate. But maybe for other people who are smarter than me.

 

This is huge, and considering all data points to a natural bottoming of the jobs market in Q3 last year, it will mean a genuine boost in jobs (rather than slowing the fall). Great pipeline of work too, so there will be some forward-security in employment. I suspect it will put a stop to the levels of outward migration that have been experienced (up to 10,000 people/year), which is enough to throw the current number of dwelling approvals in to a mild under-supply in 2018. Very exciting times.

 

Dont wish to be negative But the trains will be built overseas

 

did we learn nothing from Queensland

 

I thought it was one of their election promises that trains would be built here? of course an election promise doesn't always mean it will happen.

 

Wow, so much negativity from you, especially being a Perth local!

The trains themselves are always built overseas, as is the case with all the over east projects... it the railway construction is what matters, and that is built here.

Anyway with a whole heap of submarine construction happening out of our factories over the next few years, probably too busy to build train carriages. I have to agree with JL1 Q3 was the bottom of the job market around the same time we have seen locals starting to buy for the longer term.

Tell me you don't agree with JL1 that unemployment bottomed around then? and i don't want to hear a sob story about small retail businesses struggling, there are other factors for that... namely large competition from larger corporations and a shift to online purchasing.

Can't wait to you jump back on the Perth train, then I will know we have had some growth. Going to be a long slow ride this time round, you will need to use your real developer smarts rather then rely on the cycle. I know low consistent growth is what I would prefer going forward, the local economy starting to support that now.