Avoiding casualties in the banking war

The battle between ANZ Bank and National Australia Bank for business customers looks to be over as ANZ licks its wounds following a hard lesson from Forge Group.

The business customer war – the so-called 'shootout' – between Australia and New Zealand Banking Group and National Australia Bank appears to be over. And, as I explain below, it would seem the near collapse of the engineer Forge Group played a big role in making all banks a little more cautious, but particularly ANZ Bank.

Those businesses that did good deals during the ‘war’ should be grateful. Those that hoped to do better deals in 2014 will be disappointed.

I gather that NAB chief executive Cameron Clyne, who last month grimly warned that at least one competitor, whom he did not name, was weakening its credit standards, is smiling again.

At this point I must emphasise that ANZ Bank has denied that it is reducing credit standards and denied that there was a war, although chief executive Mike Smith in his interview with Alan Kohler on Inside Business added:

“We have improved in the terms of the way that we're… the whole relationship model… and certainly we have given much better tools in terms of technical tools to our relationship managers and I think that's probably having an effect”. (Risky bank business will end badly, November 4.)

Given Cameron’s Clyne’s rare public statement on credit standards, it was clear NAB had a different view.

A survey by Macquarie and East Partners a month or two ago caused Macquarie to conclude that the 'shootout' between ANZ Bank and NAB was “starting to bite”.

But after that survey was taken, a lot happened in Australian banking. And the best way to tell the story is to look at the Forge Group, which provides engineering and construction services to the resource, oil and gas sectors.

It would seem that earlier this year its traditional banker, NAB, began being a bit tentative. A confident Forge management could see no reason for caution and switched to ANZ Bank, which then became the main banker to Forge.

It was one of a number of middle-sized accounts that NAB lost and as the Macquarie East survey concluded, NAB began responding.

Cameron Clyne must have been grateful that NAB did not respond to the pending Forge banking switch. Forge management had got it wrong and did not discover their looming contract deficits until some months after they had switched banks. The Forge problem stems from heavy losses on the construction of the Diamantina power station in western Queensland and the West Angelas power station in Western Australia. These contracts were acquired when Forge acquired CTEC in early 2012.

Last October Forge management discovered it had problems with these two contracts and after a share suspension announced that Forge would lose between $85 million and $90 million.

ANZ Bank was owed in the vicinity of $100 million and may end up with equity. The bank needs to provide extra liquidity. It’s one thing to have a long-established client get into deep trouble. It’s much harder to explain when a new client falls over.

Just what role Forge and any other problem loans played in ending the ‘war’ may never be known. The problem all banks face is that demand for loans, particularly business loans, is depressed. And the looming collapse in mining investment and the Abbott government’s apparent willingness to shut down the motor industry will make things worse. (Australia's five tidal waves of unemployment, December 9.)

Meanwhile, anyone who sees Cameron Clyne walking down Collins or George Streets will notice that smile on his face. The war that never was is over.