Stressed exposures to commercial property could surge 5-6 times in a downturn: Morgan Stanley
Major-bank stressed exposures to commercial property could jump five-to-six times in a downturn, according to Morgan Stanley.
Stressed loans by the major banks to the commercial property sector could surge five-to-six times in a downturn of similar force to the global financial crisis, according to Morgan Stanley.
Last March, at the end of the first-half of Westpac’s 2022 financial year, just two per cent of the bank’s commercial property portfolio was stressed, with only 0.2 per cent impaired.
However, in 2009, as the banks took multiple hits from the financial crisis, Westpac disclosed that 12.5 per cent of its commercial property exposures were stressed, including 26 per cent of its loans to developers.
The investment bank’s analyst, Richard Wiles, said in a note to clients on Thursday that the big four lenders have a $311bn, combined exposure to commercial property – and a total exposure to the troublesome construction industry of $43bn.
Stressed loans or exposures are considered to be at a significantly higher risk of default than when they were evaluated.
The recent collapse of a number of building companies, including Pivotal Homes, Probuild and Condev, has raised the level of risk associated with major-bank exposures to the industry.
Fears of a global recession are intensifying as central banks around the world rapidly hike official interest rates to try and smother an inflationary spiral.
Jamie Dimon, chief executive of JPMorgan Chase, the largest US bank by assets, warned overnight on Wednesday of an economic “hurricane”, as markets swing wildly in response to the war in Ukraine and policy tightening by the US Federal Reserve.
Mr Dimon amplified the threat only a week after he had referred more benignly to “storm clouds”. “I said they’re storm clouds; they’re big storm clouds here. It’s a hurricane,” he said.
“That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy … and you better brace yourself.”
New York-based Lazard Asset Management fund manager Ron Temple told a Morningstar conference in Sydney that he rated a US recession as a 30 per cent to 40 per cent chance. Inflation, he said, had undergone a “paradigm shift”, and was likely to double over the next 3-5 years from an average of 1.7 per cent over the last decade. “A recession is not my base-case scenario, which might sound surprising after I’ve just sketched out a pretty worrisome scenario around inflation, rent and wages,” Mr Temple said. “I would rate a US recession as a 30-40 per cent chance through the middle of 2024.”
Locally, while bank chief executives have been generally upbeat about the economy, they have been gloomy about the prospects for the construction industry.
National Australia Bank chief executive Ross McEwan said earlier this week that construction was particularly vulnerable given fixed-price contracts in an environment of supply-chain challenges and rising costs of materials and labour.
“It’s certainly one of the sectors that we are keeping a close eye on very recently,” Mr McEwan said. “A lot of them have been having some difficulties there so that is, as a sector, the most worrying part of our book when we look across it. We are yet to see that the economy is having difficulty … but as interest rates start to rise, we have to be conscious that there will be some customers who may have some difficulties.”
Pivotal Homes, which was put into liquidation late last month, has built more than 1500 homes over 15 years in the industry.
Michael Irwin, Pivotal’s managing director, said the rising costs impacting the industry throughout the country had made the company’s operations unviable. “In my 30 years’ experience, I have never seen a set of circumstances like this, and obviously we are not alone in these unfortunate conditions facing the industry,” he said.
Mr Wiles, in his note, wrote that construction accounted for 1.5 per cent of non-mortgage exposures at ANZ and two per cent at Commonwealth Bank, NAB and Westpac. Disclosures suggested that 20 per cent was unsecured and 25 per cent partly secured.
Of the $311bn in commercial property exposures, there was $234bn in outstanding loans.
While commercial property accounted for only 6.5 per cent of the banks’ total group exposures, it made up 12.5 per cent of their non-mortgage exposures and 23 per cent of non-housing loan exposures.
Mr Wiles said residential-related loans of $38bn accounted for 16 per cent of commercial property loans, with CBA and Westpac the highest at $11bn each and NAB the lowest at $7bn.
Office ($67bn or 28 per cent) and Retail ($62bn or 26 per cent) were bigger segments, with CBA and NAB having the largest exposure and ANZ the smallest.
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