February 11, 1991

Article at Reuters

Australian state-owned bank joins others in flood of red ink

South Australia’s Premier John Bannon speaking with visiting Japanese journalists

By Wilson da Silva

SYDNEY – South Australia’s Premier John Bannon, who announced a billion-dollar bail-out of his state-owned bank at the weekend, said on Monday his political future depended on the recovery of the institution.

Bannon’s Labor government on Sunday said it would bail out the State Bank of South Australia (SBSA) with A$970 million (US$760 million) in capital, about half of which would be directly injected, and the rest made available as needed.

The bank, which admits potential losses of around A$$1 billion (US$780 million), said on Sunday its non- performing loans, or loans not accruing interest, could reach A$2.5 billion (US$1.95 billion)

“I believe I’ll be judged on how effective that action is and how well we handle the problem,” Bannon said in a radio interview.

Bannon, who is also state treasurer, ordered an inquiry into the losses and said raising taxes and cutting government services could not be discounted to pay for the bank’s rescue.

Australian Ratings said it had placed the credit rating of the bank and the South Australian Government Financing Authority on a negative rating watch as a result of the bail out. Both currently have the highest rating.

SBSA joins other state-owned banks which have suffered from plunging property values and too-eager lending.

The state of Victoria has been beset by financial problems since early last year, when it revealed the State Bank of Victoria’s merchant banking arm had losses of A$1.5 billion (US$1.2 billion).

Australia’s Treasurer Paul Keating later said the national Labor government’s Commonwealth Banking Corp would buy the State Bank of Victoria, excluding its troubled merchant banking unit, to rescue Victoria’s Labor government from financial crisis.

“It’s obviously symptomatic of plunging asset values and imprudent lending,” said analyst Peter Hooker of broker BZW Australia Ltd.

One banking analyst said the SBSA losses were not unexpected, but their size was. “I don’t think it’s going to be contagious,” he said.

“The economies where activity has been weakest is where there have been problems. New South Wales and Queensland are doing okay, I suspect they’ve weathered the downturn reasonably well.”

Tasmania Bank, State Bank of New South Wales Ltd, Rural and Industries Bank of Western Australia and the Commonwealth Bank have all suffered from Australia’s domestic recession but have not required a bail out.

But many of them have suffered. Rural and Industries Bank announced a A$185 million (US$144 million) provision for bad and doubtful debts in the year to March. Tasmania Bank in the year to August put aside A$11 million (US$8.6 million) for bad debts and made a A$6.9 million (US$5.38 million) loss.

Australia’s three largest private banks – Westpac Banking Corp, Australian and New Zealand Banking Group Ltd and National Australia Bank Ltd – have also felt the squeeze, reporting bad debt write-offs totalling A$2 billion dollars (US$1.6 billion) in 1990.

Treasurer Keating said the national government would not inject federal funds to save the bank, but had agreed to increase South Australia’s overseas borrowing limits.

The woes of the State Bank of Victoria came on the heels of the July 1990 collapse of that state’s Farrow Group of three building societies, similar to U.S. savings and loans institutions, and the state’s largest non-bank financial group.

It led the Victorian government to guarantee A$1.3 billion (US$$1.01 billion) in unsecured deposits. The debacle toppled Victoria’s Premier John Cain.

Victoria’s woes caused a run on the smaller Bank of Melbourne Ltd and the Metway Bank Ltd, forcing the country’s central bank to intervene and assure investors that their deposits with the banks were safe.