prices may have brought immense relief to consumers enjoying the
lowest fuel prices in half a decade, yet it has also sparked a string
of sectoral and structural repercussions.
The staggering decline in
wholesale spot and futures prices continues unabated, posing a
significant threat to credit market stability and the Big Four
Australian banks which are heavily exposed to the energy sector.
Of the Big Four, ANZ is leveraged most highly to the energy sector.
The bank’s total investment in coal and gas companies amounted to
A$6.7 billion between 2008 and 2013, with A$1.8 billion in Liquefied
Natural Gas (LNG) projects alone.
Spread across five projects, ANZ’s
ventures include supplying part of a syndicated loan funding for
Santos’ A$1.2 billion Gladstone LNG project and participating in
Origin Energy’s Australia Pacific LNG Joint Venture that totalled
Plunging West Texas Intermediate (WTI) and Brent crude oil prices have
already inflicted widespread spending cuts and concerns over new
project viability. Merger and acquisition demand has been dampened in
the short term yet takeover targets are presenting quickly. Credit
downgrades are rising in frequency as long term strategic plans for
expansionary energy production have been flipped upside down.
Tumultuous price action is expected to intensify as the price of crude
oil fails to find support.
Suppliers operating at a high cost of production will increasingly
face liquidity concerns, potentially causing widespread defaults on
the vast quantity of loans injected into the sector over the past
decade. In the US, energy debt comprises nearly 20.0 percent of the
total high-yield bond market, translating to approximately US$90
billion, of which 13.0 percent was wiped out in the past few months.
Australia is extensively exposed to volatile price action. Cash
strapped energy companies are faced with a flood of write-downs and
devaluations. Santos’ market capitalisation has slumped by fifty
percent since August, attracting unwanted attention from Standard &
Poor’s and a downgrade in the firm’s credit rating to BBB.
companies’ debt burdens are rapidly posing a risk to the banks, with
immediate adverse effects to include direct defaults on loans,
indirect defaults through securities on bad loans and hikes in overall
bad debt expenses.
Between 2008 and
2013, the Big Four banks invested nearly A$20 billion in fossil fuel
projects across Australia, with a substantial amount dedicated to LNG.
If the industry is adversely impacted by multiple defaults these debts
will heavily impact Australian bank’s profit margins and capital
A significant portion of the major banks’ record profit of A$28.6
billion last year was underpinned by decreases in bad debt provisions.
Aggregate bad debts across the Big Four fell by A$1.6 billion,
contributing up to an estimated 60.0 percent of total pre-tax profit
growth (A$2.7 billion more than 2013). A sudden increase in provisions
for bad debts in the energy sector could result in a considerable
strain on bank earnings in the next reporting period.
The Big Four constitute more than three quarters of total business
borrowing in Australia, reflecting varying degrees of exposure. Their
engagement in specific sectors directly influences the funding
capacity of associated sectors, posing a systemic risk to the overall
condition of credit markets.
As the scope of commodity market upheaval is more accurately
quantified, lending practices will quickly come into focus coupled
with the impact of minimum liquidity regulations. Optimism towards
business credit conditions improving is arguably premature given
inconsistent underlying demand for new lines of credit in terms of
business size. Australia’s largest Top 500 enterprises by revenue are
pulling the purse strings tighter while enterprises in the Corporate
segment represent a record high percentage of total business loan
Forward dated commodity demand and sentiment is further clouded by
Chinese authorities cracking down firmly on shadow banking practices.
Commodity markets suspected to be propped up by overleveraged Chinese
buyers are set to be affected as authorities actively crack down on
the worryingly high number of margin lenders and non-bank financiers.
The immediate financial relief consumers receive from declining oil
prices is a relatively miniscule artificial sweetener for Australian
consumers and business owners alike. Natural gas and crude petroleum
represent the third and seventh most popular commodity exports
respectively, approaching A$27 billion between 2013 and 2014. Their
long term resilience will be crucial to the stability of credit
markets, bank balance sheets and the Australian economy more broadly.