Banks fear rise in bad debts from miners

Based on a survey undertaken by UBS, senior executives at Australia’s largest banks are expecting an increase in bad debts from mining and mining services companies as the value of commodities continue to fall amidst the decline in growth in China.

According to The Australian Financial Review, the survey found that the bad debt situation in mining over the next 12 months is expected to “deteriorate somewhat” with Chinese authorities now becoming more concerned about China’s growth prospects.

The looming threat didn’t stop ANZ (ASX: ANZ) from offering up $1 billion in finance to Gina Rinehart last week however, in order to bridge her Western Australia iron ore project. Whilst the prospects of the mining sector have remained quite bleak in recent times, ANZ’s decision to finance Rinehart may have been influenced by the common belief that the Reserve Bank will cut interest rates to a new record low early next week (with speculation of a further two rate cuts to follow).

The central bank is likely to cut the rate in order to reignite a spark in the Australian economy, which would likely benefit the mining industry, giving them a better chance to pay their dues.

Whilst an increase in bad debts are expected from miners, ANZ, along with fellow big banks NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA) are hopeful that other problem loan areas such as tourism could begin to pick up with the fall of the Australian dollar.

Foolish takeaway

Whilst the increase in bad debts from mining companies would hurt the banks’ profits, the banks should benefit from other areas of the economy if interest rates fall further. For instance, the property market could receive a spark and more individuals may take out loans.

In order to capitalise on this, Westpac (ASX: WBC) may need to further consider cutting its mortgage loan rate from 6.26% to match the 6.13% and 6.15% rates offered by its competitors.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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