‘Call us’: CBA’s Mike Vacy-Lyle’s message to small business as he warns of loan defaults
One of Australia’s most senior bankers has a clear message to smaller businesses as he warns of loan defaults, particularly in the construction and retail sectors.
One of Australia’s senior banking executives has warned of defaults across small and medium-sized business lending in the months ahead but believes the nation will avoid a recession.
Michael Vacy-Lyle, Commonwealth Bank’s business lending executive, said the bank was stress testing and contacting customers across its business lending book, particularly in the higher-risk construction and consumer discretionary sectors.
While he was broadly optimistic, Mr Vacy-Lyle encouraged any small and medium-sized businesses that were starting to feel financial stress to call their banker, stating: “We will work with businesses”.
It comes as soaring building material costs have heaped pressure on the construction sector with Metricon slashing 10 per cent of its workforce and other operators have collapsed, while multi-billionaire property developer Harry Triguboff has called on the Reserve Bank to halt its most aggressive series of interest rate hikes in 30 years.
The RBA resumed raising interest rates in May – two years earlier than it previously flagged – to curb soaring inflation, which is expected to near 8 per cent by the end of the year. This has lead to a borrower with a $1m loan paying an extra $1000 a month in interest since April, reducing the amount of income they have to spend on discretionary items, triggering concerns that some retailers will default on their loans.
But Mr Vacy-Lyle said at this stage CBA – which increased its business lending by $33bn in the past year and made an overall $9.6bn profit – had a “through the cycle” view. This means the bank is focused more on a medium-term horizon rather than short-term shocks from the RBA’s rate hikes, price rises and consumer sentiment swings.
“We have taken our portfolio and played out a few scenarios and run some probabilities around downturn and severe down and we’ve got a neutral model and then we have got a severe downturn model,” he said.
“Absolutely there will be some defaults in construction and the consumer retail sectors. At this stage we remain with our through the cycle view.”
Mr Vacy-Lyle said CBA had begun to see a slowdown in spending last month, particularly in fashion and footwear purchases, which he described as an “early warning indicator of entering a period of stress”.
Meanwhile, he said the “chickens have come home to roost” in the construction industry’s fixed price contracts, halting the ability of firms to pass on the rising cost of building materials.
“They’ve also had labour issues and supply chain issues, so that’s really put a lot of stress on the sector.
“We will have a look at our construction homebuilding portfolio and our discretionary retail portfolio. We’ll create a lost of businesses that we want to interact with and we think we will need to interact with more regularly. In general, we will be very proactive in reaching out to our customers.
But Mr Vacy-Lyle said he did not believe Australia was entering a recession, with businesses having about $100bn in savings.
“I don’t think this is a recession. I think the difference with this cycle is the level of cash in the system both on household balance sheets, sitting on redraw accounts… and on SMEs (small and medium-sized enterprises) balance sheets.
“This time, in this particular cycle, businesses are lowly geared and have cash.”
Elsewhere across its business lending portfolio, Mr Vacy-Lyle said CBA’s clients in other sectors had generally managed to pass on cost rises, preserving margins. For example, Bega Cheese executive chairman Barry Irvin told The Australian on Monday that the supermarkets had recognised in price negotiations that Bega has paid farmers an extra 30 per cent for their milk.
“We have seen margins remain reasonably OK across our business customers generally. There have been a lot of businesses that have been able to pass it on,” he said.
But Mr Vacy-Lyle agreed with a report from rival ANZ, which said food manufacturers need to spend an extra $87bn in capital investment by 2030 to double sales to $200bn and increase productivity, which would bolster supply and help keep a lid on inflation.
“We need to invest in productive capacity, industrial manufacturing plants and in logistics and cold storage,” he said.
“This is an opportunity for the future and one we are watching closely. The lending in this space will be mostly infrastructure-based.”
CBA has been seeking to boost its position in business banking to better compete with dominant player National Australia Bank. In the past year, it has delivered almost 14 per cent growth in business lending and 15 per cent growth in business deposits.
Chief executive Matt Comyn said on Wednesday business lending volumes continued to be “very robust” but would also slow across the industry as rate rises crimped demand for some products.
Whyalla steelworks losing $1m a day but Gupta’s defiant
Sanjeev Gupta says his broader business has been propping up the Whyalla operations to the tune of $1m a day which is a sign of the commitment he has to the South Australian steel town.
Why an Aussie banker landed a key role in this succession drama
This former Melbourne boy and Wall Street boss is now in charge of steering Disney through one of the toughest succession stories in corporate America.