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Risk of mining bad debts lower for banks

A report released by JPMorgan and Digital Finance Analytics (DFA) has downplayed fears of an upswing in bad debts for Australia’s major banks, suggesting that the transition away from mining investment growth will still be “bumpy” but not as bad as first expected.

Earlier in the year, a number of senior executives at Australia’s largest banks expressed their concerns that the number of bad debts would increase as the value of commodities fell and the level of projects decreased.

Commonwealth Bank (ASX: CBA), for instance, is exposed to Western Australia through its BankWest business and currently holds a lending book worth $20 billion. Similarly, National Australia Bank (ASX: NAB) is the nation’s biggest lender to small to medium enterprises (SMEs), although its loan book is quite diversified.

However, low interest rates actually boosted business confidence to a three-year high last month, allowing more SMEs to pay their debts on time. Meanwhile, commodities have remained stronger and more resilient than most analysts had expected and the banks have been more stringent in lending to riskier sectors in an attempt to restrict the possibility of bad debts occurring.

As such, fears seem to have subsided regarding the risks faced by the banks for the transitional period. The banks have still experienced higher losses from the construction and retail industries in New South Wales and Victoria than they have in Western Australia or other states heavily exposed to mining. The report stated that “There is no smoking gun from the wild west at present, with the majority of SME stress still pertaining to retail trade, manufacturing and the construction industries in NSW and Victoria.”

Foolish takeaway

The mining sector remains volatile and a large occurrence of bad debts could still occur, however, as business and consumer confidence increases, the banks will hope to benefit from other areas of the economy. As an example, ANZ (ASX: ANZ), which is concentrated towards the retail and manufacturing sectors, will benefit from a boost in consumer confidence.

At today’s prices, it remains difficult to see how the banks could deliver market-beating returns. Instead, are you interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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

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