Could the struggling retail sector be the banks’ next big problem? The RBA thinks so

Could the struggling retail sector be the banks’ next big problem? The RBA thinks so – ABC News

Here is the proof things are not good and the assault on Australia’s business assets, and domestic housing market are seen as much the same thing.

It’s no holds barred as the free for all continues to swallow up just anything foreigners can get their hands on as a compliant government sits on its own!


Could the struggling retail sector be the banks’ next big problem? The RBA thinks so


The Reserve Bank posed an interesting question last week: are Australia’s banks, and therefore the broader economy, vulnerable to a shaky retail sector.

Key points:

  • RBA paper argues changing retail environment could impact banks’ asset quality
  • Minimal impact from retail downturn so far, but RBA says it needs to be closely watched
  • Asian banks have aggressively entered commercial property lending, picking up a lot of the risk from Australian banks

After all, conditions in retailing haven’t been great for a while, failures are mounting up, yet retail property development — much of it funded by banks — is growing above its historical average.

The list of high profile failures is mounting: Herringbone; Rhodes and Beckett; Top Shop; and Dick Smith.

OrotonMarcs, David LawrencePumpkin Patch,Payless Shoes, Live Clothing and Maggie T.

Even the ABC, having retreated from its bricks and mortar presence three years ago, has now waved the white flag on its online business too.

Metalicus folded in May. Giant global fashion label Esprit also gave up the ghost in Australia in May, closing 67 stores.

Toys ‘R’ Us shut the last of its 44 Australian outlets in July.

All of them were staples not only on the High Street shopping strips, but also in big shopping centres — either as concessions or stores of their own.

“The flow-on effect to Australian banks so far appears minimal,” the RBA’s Gabriela Araujo and Timoth de Atholia wrote in a research paper.

Online retail growth

However, the pair found that, [9876=-013212



“One contributor to this is the numerous refurbishments to shopping centres being undertaken to accommodate large international retailers and place a stronger emphasis on services and hospitality — differentiating shopping centres from online retailers,” they wrote in the RBA’s September quarter bulletin.

That battle with online retailers is a central issue for banks and, by extension, their financial stability.

Online retailers are rapidly gaining market share. Sales growth is heading towards 50 per cent, albeit off a very low base, while in-store sales are still growing, but only just.

Squeezing traditional retail from the other side are a number of more cyclical pressures; low wage growth, meaning consumer spending is being underwritten by rapidly shrinking household savings.

Even then, preferences are changing as larger slices of disposable income are being spent on “retail services”, such as cafes and restaurants, relative to goods.

“One risk is that the changing retail environment might lead to store closures or insolvencies of domestic bricks-and-mortar retailers,” the RBA paper argued.

“This could result in higher vacancy rates at shopping centres and make it harder for shopping centre owners to meet their debt obligations. In turn, this could have implications for banks’ asset quality.”

Depressed valuations

The RBA’s liaison with banks and business suggests that banks are concerned about the outlook for discretionary goods retailers, which is weighing on their willingness to lend.

Department stores are under pressure and, with their large footprints in shopping centres so obvious, closures would lead to a lot of vacant territory in shopping heartlands.

This too could have spill-over effects, hitting neighbouring shops and profitability.

“Owners of refurbished centres, or nearby centres, may then find themselves unable to meet debt obligations and be forced to sell, precipitating price declines,” Ms Araujo and Mr de Atholia said.

“Price falls generated by sell-offs, or unexpected increases in long-term borrowing rates, would depress valuations, which might then mean owners breach loan-to-value ratio covenants on their bank debt, potentially triggering further sales and price declines.”

As the old adage goes: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”

No alarm bells … yet

The RBA is not ringing alarm bells yet, arguing the major banks’ non-performing loan ratios for the retail business sector and retail commercial property remain low.

“However, due to the difficulties currently facing these sectors, and the intention of some retailers to reduce their physical footprint, banks’ growing exposure to retail properties warrants close monitoring,” it noted.


Veteran CLSA bank analyst Brian Johnson agrees, saying at the moment it isn’t a big problem given retail property these days is a relatively small part of the banks’ overall loan portfolio, it is worthwhile keeping a close eye on things.

“Post-GFC system credit growth has been skewed towards housing to the point that proportional exposures to anything else, including commercial real estate, is much reduced,” Mr Johnson said.

Basically banks are grandiose building societies, with loan books dominated by residential property.

CBA and Westpac total loan books are almost 70 residential mortgages, ANZ and NAB are a bit under 60 per cent.

Commercial real estate accounts for between 6-to-10 per cent of the big banks’ loan books, around half of which is is retail.

History’s tough lessons

The banks only need look back to Australia’s last recession early 1990s to see the damage a concentration in commercial real estate loans can do.


Westpac nearly blew itself up in 1992 with a 40 per cent exposure to commercial real estate. More than 4 per cent of its loans were impaired and it needed an emergency recapitalisation to keep its doors open.

“Bank asset quality cycles are typically driven by recurring bouts of ill-disciplined asset based credit lending during which banks get over-exposed to potentially correlated asset classes, followed by a sharp liquidity crunch,” Mr Johnson said.

“Bank behaviours potentially magnify asset value cycles — particularly for commercial real estate — as proved the case in 1992 when Westpac required a massive recapitalisation given an over-exposure to commercial real estate.”

However, it may not be the Australian banks that carry the “commercial property can” in the next downturn.

While commercial real estate lending is at a record high at $235 billion, the major local banks’ lending to the sector has pretty well stalled since March 2016.

Asian banks have stepped into the breach aggressively and now hold around 13 per cent of total commercial property loans. It is a market share that is growing rapidly.

This transfer of incremental commercial real estate risk to Asian banks greatly reduces risk for Australian banks,” Mr Johnson said.

Topics: bankingretailaustralia