Try to understand "bad" loans

Discussion in 'Property Finance' started by inspiredbyprop, 20th May, 2016.

Join Australia's most dynamic and respected property investment community
  1. inspiredbyprop

    inspiredbyprop Well-Known Member

    19th Jun, 2015
    Hi Folks,

    The headline news (and a lot of folks) recently predicted bank shares will fall because of the high level of bad credit loans and it will impact the dividend and also share price in the near future. For this thread, let's just focus on the Big 4 banks.

    Here are what I think in order of the severity:
    1. The major source of bad loans are coming from the recent defaults/disasters in big AU businesses e.g. BHP, Dicksmith, Masters, Automobile (Holden, Ford) etc.
    2. The issue from investment (commercial & resi) properties is quite impactful but won't be at a scale like the US subprime mortgage crisis.
    3. The issue from residential (home owner) properties is minor in comparison to the whole situation.

    Conclusion: I don't see how the #2 and #3 will become a major issue and property is not likely to be the issue. Hence, I say #1 defaults and disasters in the big AU companies are the culprit :) as it will also have downward impacts on jobs etc.
    1. AU house price has increased steadily in the last couple of years
    2. AU migration rate and population growth have been steady
    3. AU banking policy is quite solid and the likelihood in a situation like US subprime mortgage crisis is low

    Now, what do you say?

  2. Bayview

    Bayview Well-Known Member

    22nd Jun, 2015
    Inside your device
    If Banks suffer significant bad loans from the Commercial sector, it would be fair to assume that it means lots of larger businesses (or only a few businesses with massive losses) have recently folded, or had to scale down in a large way, etc.

    All of this means loss of jobs...both in the Companies themselves; and the Banks too will scale back on costs (staff) as well, claw back funds through various fees and charges wherever they can.

    Losses of jobs without any slow-down in population growth due to immigration and/or births will add more to the welfare lines, more competition of jobs and ultimately a stall in wage growth, economic growth, larger Gubb deficits.

    This current idea in the Election campaign of maintaining a steady 50k per year Immigration number sounds all warm and fuzzy and kumbaya, but who will pay for it?

    Both Parties are flicking out promises of "returning to surplus by Year X", yet since about 12 months into Kev/Julia/Kev, and now Tony/ has only continued to go up. They are both sprouting BS.

    The unemployment rate is not dropping, the deficit is not dropping, the revenue is not rising, the interest rates are dropping, the wages have stalled....

    With no economic growth, it will become even more a possibility that larger Companies might struggle to keep the GP they need to keep away from the losses we are seeing.

    Of course; it's not all fueled by just our local climate - O/S factors have an influence on the Big Boys too.

    Back to the real estate aspect; less folks and businesses working/making money/getting increases in wages/revenues - means less folks can afford to buy houses; less demand on r/e purchases.

    Prices of r/e stop rising, lots more Comm r/e vacancies (and/or longer vacancies), less r/e construction, possibly more pressure on resi rents to go up.
    Last edited: 21st May, 2016
    Ted Varrick likes this.
  3. Ted Varrick

    Ted Varrick Well-Known Member

    21st Jun, 2015
    No Mans Land
    IBP, if you reread your post and consider the following:-

    1. The are some of the situations that have come to light, and, like Bayview says above, have led to ugly job losses, Dick Smith it's been reported 3000, Holden and Ford reportedly also in the 1000s, which, in the case of the latter, may have impacts on actual suburb valuations. Whilst the employees may get redundancy cheques, there are some who might not use them as wisely as others, such as taking a big holiday as a reward for their years of effort, and with the bonus of a new car, rather than dumping them into offset accounts, . Certainly Whyalla and Townsville residents, investors and businesses might experience a lack of confidence as Arrium and Qld Nickel have the details of their excesses revealed...

    2 & 3. Issues from investment (commercial and residential) and owner occupied residential, as from your post, are very minimal, which means a prudent investor might consider (say, looking out over a 5 or 10 year period) what the probability of these defaults minimising even more or getting somewhat worse... Not necessarily going nuclear like the US, but just a bit pearshaped.

    Furthermore, in the light of banks upping LVRs and giving the boot to overseas borrowers with questionable income, what might bank shareholders (and short sellers) do if monthly credit growth were to decline?

    On the other hand, all these mining towns that are now toast might offer a perfect opportunity for a 105% lend, so surely there's a bunch of money to be made by buying with your (figuratively not literally) ears pinned back, and just waiting until "the market turns".