Investors will be looking to see whether bad debts at Westpac Banking Corporation have peaked when Australia’s second biggest lender reports earnings this week.

Westpac, the last of Australia’s banks to report its fiscal 2009 earnings, said in August that bad debts had risen in the third quarter, while it had increased its watchlist for borrowers who might have trouble with repayments.

CLSA banking analyst Brian Johnson says market observers will be looking for an update on bad and doubtful debts when the bank reports on Wednesday.

“Westpac had given us very strong guidance at the third quarter, and what we noticed there was a sharp escalation in their watchlist and substandard loans,” Mr Johnson said.
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All eyes will be on asset quality, margins and surplus capital as signs that the bad debt cycle has peaked and margins are set to expand as interest rates rise, when the big banks begin to report their annual results this week.

All of Australia’s big banks are now cashed-up with strong balance sheets after a raft of capital raisings over the last 12 months.

The raisings were in reaction to escalating bad debts, losses from toxic conduit assets and funding pressures in the wake of tight credit markets.

While analysts differ over whether bad debts will peak in the September 2009 half or in early 2010, all point to surplus capital that may be returned to shareholders during 2009/10 if a large bad debt buffer is no longer needed.
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