Commonwealth

Now that the big four bank reporting season is over, there’s one thing that really stands out — the massive contrast between the COVID-19 crisis and the GFC when it comes to bad debt provisioning.

The big four were slow to recognise how bad the GFC was going to be, with only modest write-offs in 2007-08 of $5.62 billion, up from the boom-time low of just $2.24 billion in 2006-07. This was followed by a huge jump in 2008-09 to a record $13.1 billion in write-downs, followed up by a still historically large collectively write-down of $8.2 billion in 2009-10.

This time around, all of our major banks went way over the top with excessive COVID-related provisions only to very quickly reverse some of that pessimism, as shown by results released by NAB, ANZ, Westpac and CBA over the past week.

The latest was only confirmed by CBA this morning when its March quarter cash profit of $2.4 billion included a small reversal of previous bad debt write-downs (see page three), something that is normally incredibly rare in the banking world but has now happened to all four of our big banks.

Check out these numbers to see how bad debt accounting at the big four differs between the GFC and the pandemic of the past 12 months.

CBA full-year bad debt provisions

2006-07: $434 million
2007-08: $930 million
2008-09: $2.93 billion
2009-10: $2.71 billion
2010-11: $1.28 billion
2011-12: $1.09 billion
2017-18: $1.08 billion
2018-19: $1.2 billion
2019-20: $1.87 billion
First half 2020-21: $882 million.

ANZ full-year bad debt provisions

2006-07: $537 million
2007-08: $1.27 billion
2008-09: $3.06 billion
2009-10: $1.78 billion
2010-11: $1.21 billion
2017-18: $688 million
2018-19: $794 million
2019-20: $2.74 billion
First half 2020-21: $491 million write-back.

NAB full-year bad debt provisions

2006-07: $790 million
2007-08: $2.48 billion
2008-09: $3.81 billion
2009-10: $2.26 billion
2010-11: $1.8 billion
2017-18: $791 million
2018-19: $927 million
2019-20: $2.76 billion
First half 2020-21: $128 million write-back.

Westpac full-year bad debt provisions

2006-07: $482 million
2007-08: $931 million
2008-09: $3.29 billion
2009-10: $1.45 billion
2010-11: $993 million
2017-18: $710 million
2018-19: $794 million
2019-20: $3.18 billion
First half 2020-21: $372 million write-back.

Annual big four bad debt write-offs have averaged around $4 billion a year over the past 15 years but it soared to $10.5 billion in 2019-20 before the banks realised they had been way too conservative.

Remarkably, the big four collectively wrote-back $109 million over the last six months. CBA was the most accurate player with an $882 million provision booked for the first half of 2021-21 because it didn’t go quite so over the top last August, only provisioning $1.87 billion for the full 2019-20 year. (However, it has today unveiled a small write-back in the March quarter.)

Compare CBA’s effort with NAB’s new CEO Ross “doomsday” McEwen who lifted provisions from $927 million in 2018-19 to $2.76 billion in 2019-20 after unveiling a controversial $4.25 billion emergency equity raising. Since raising this unnecessary equity, NAB has announced about $4 billion in dividends and last week’s half-year result included a $128 million bad debt write-back.

Westpac was even more inaccurate than NAB as bad debts soared from $794 million in 2018-19 to $3.18 billion in 2019-20, before $372 million was written back in the latest half.

But it was ANZ which took the gold medal for write-backs because after provisioning $2.74 billion in 2019-20 (up from just $794 million in 2018-19) it then wrote-back $491 million in the latest half.

All of this is just further evidence of the fact that Australia’s economy has roared back into life, largely because the government overdid it with the stimulus and compensation payments — particularly the JobKeeper program. The Reserve Bank has also printed almost $200 billion to buy government bonds, albeit only after they have been laundered through the private investment community, such as our big banks.

The Coalition seems to have made the same mistake as Kevin Rudd who during the GFC probably spent about twice what was necessary when he too could have followed the money-printing path pioneered by the US Federal Reserve at the time.

This acceptance of money printing partly explains why the enormous debt and deficit figures which Josh Frydenberg unveiled in his budget last night won’t particularly unnerve investors or financial markets. The whole world is doing it so why not join the party.

Who needs austerity when you can print your way out of trouble — a policy which has energised and stimulated the economy like never before, leading to incredibly low levels of bad debts incurred by our big four banks over the past few months.