Banks + property = worries. The Reserve Bank’s first Financial Stability Review of the year is out today. and the usual suspects will be rounded up by analysts and others spending an easy Friday afternoon reading. The system is in good shape, but there are a few niggles. One niggle I hear from the depths of the National Australia Bank is its exposure to property development — 21,000 loans to developers for a collection of mostly apartments, units and townhouses. The loans are concentrated in Sydney and Melbourne, and it must be worrying the board and management because new developers are being put through the wringer by NAB lending executives before they even start talking about how much money the developer will get (not as much as they want, seems to be the answer). 21,000 loans at half a million dollars each is between $11 and $12 billion. Given that apartment prices are reportedly falling in value in Sydney and Melbourne, some of these loans might not be washing their faces shortly, which could mean a rise in arrears and bad debts/impaired loans. — Glenn Dyer
Oil madness ahead. They are a crazy, madcap mob in the oil market — show them a set of statistics or an obvious statement and they will take what they can from it: all gloom, if that’s the prevailing wisdom; or all boom, if it’s suddenly all sunny-side up. At the moment the oilies are all hopin’ and wishin’ for good news on Sunday — a cap on oil production by OPEC — and are ignoring Iran’s ambitions to lift production by 1.5 million barrels a day. Some of the oilies are claiming that will be followed by a production cut — led by Saudi Arabia, Russia or Uncle Tom Cobbeleigh (the bloke who owns the servo at the bottom of the street). The market reckons there will be a deal struck between the Saudi and the Russians that will ignore Iran. But just how that will be done was left to the oil elfs at OPEC to achieve. Likewise an actual production cut.
Saudi Oil Minister Ali al-Naimi put paid to that fantasy when he told a newspaper on Wednesday “Forget about this topic,” in relation to a Saudi production cut. The Saudis and Russians are already producing at recent highs of well over 10 million barrels a day and no one has heard them volunteering to cut output. And data out this week showed a larger than forecast rise in US oil stocks last week – 6.6 million barrels to 536.53 million barrels, according to the Energy Information Administration, compared with market forecasts for a 1.9 million-barrel rise. Traders ignored US production falling under 9 million barrels a day for the first time in since 2014 — 8.977 million barrels in the week to last Friday, down from 9.008 million the week before and 9.384 million a year ago. That was probably a more important data point than the build up of stocks. — Glenn Dyer
US banks provide. This week’s first quarter results from JPMorgan Chase, Bank of America and Wells Fargo have revealed the painful truth of their splurge in lending to energy companies — the trio added a total of more than US$1.5 billion to their loan loss reserves for dodgy energy loans, JP Morgan said it could add a further US$500 million later in the year. Citigroup, Morgan Stanley and Goldman Sachs are to come. Total loan loss reserves are approaching US$5 billion according to some analysts, and that could be doubled for the big banks by the end of this year. And then there’s the losses for coal companies, such as Peabody Energy. Its banks include some or all of our big four. Ouch. More grist for the RBA’s Financial Stability Review. — Glenn Dyer
Global warmer down. The coal industry — what the Americans call a whack-a-mole mob (that’s a game where when a mole like toy sticks its head up out of a hole on the board, you hit it, and keep hitting it as it keeps popping up, a bit like the coal industry and its miners, especially in the US). A month ago we reported that Peabody Energy, the world’s largest privately-owned coal miner, was on the ropes and heading for collapse. In the very early hours of Wednesday morning in the US (before 5am), the inevitable happened and crunch went Peabody and its US coal mining business, leaving the Australian mines untouched by the failure. And yet this is where the company’s collapse was generated (by paying $5.1 billion) for Macarthur Coal at the height of the coal boom in 2011. Peabody’s failure means that producers accounting for around 45% of America’s coal output of around 900 million tonnes a year, have collapsed. Names like Arch Coal Inc., Alpha Natural Resources, Inc, Patriot Coal Corp. and Walter Energy, Inc have fallen into Chapter 11 bankruptcy. Citi group had provided Peabody with US$800 million of what’s called debtor in possession finance to enable it to keep going. Peabody holds US$6.3 billion in debt, which is going to be slashed and the holders will probably be offered shares in a new company and told to take losses and like it. — Glenn Dyer