Cost of Insolvencies trends back up, bad news in Tasmania and WA

Dissolve has just released its latest Business Stress Report.   The overall trend has been that during the GFC the number of corporate insolvencies increased somewhat with the cost of those insolvencies increasing dramatically.  Post GFC, both the cost and number of insolvencies dropped from their peaks but remained well above pre-GFC levels.  In recent times both have trended up again.

Key findings of the latest Business Stress Report are as follows:

• The quarterly cost of All Bank New Asset Impairment Charges (or “Bad Debts”) for Australian Banks in the Quarter to June 2011 is $5.6 billion.  That is an increase on the March quarter, which was $5.1 billion, and well above the average pre-GFC level of $1.1 billion.
• The number of companies entering some form of insolvency administration in calendar year 2011 continues to set new records.  The months of March, April, June and now July 2011 have been the highest ever for each of those months.  The calendar year to July 2011 is also the highest ever.
• In the year to July 2011 there were 1,355 appointments by Secured Creditors, which will be predominantly Banks appointing Receivers.  Again that is the highest number on record.
• An analysis on a state-by-state basis reveals significant deterioration in some states with Tasmania leading (up 80%) and Western Australia (up 69%).  There is a more moderate increase in insolvencies for Victoria (up 17%), South Australia (up 25%) and Queensland (up 24%).  New South Wales is only up 4%.

There are several items of note in the statistics.

Firstly, since the onset of the GFC, the cost of insolvencies to Australian Banks rose very significantly and while it has declined it remains very high.  In the financial year ended June 2011 total new bad debts were over $22 billion.  Pre-GFC the figure was commonly $4 billion.  Further, the June Quarter was an increase on the March quarter so it is remaining stubbornly high.  Have a look at the graph below – ugly!

Secondly, the number of insolvency appointments is an indicator of the health of SMEs in Australia and the news is not good.  What had been a declining trend through 2010 has turned and 2011 is setting a number of new records.

Thirdly, the state-by-state analysis reveals a few surprises.  Have a look at this graph.

For each state, we have examined the increase in insolvencies in 2011 compared to the previous five years.  Tasmania and WA have experienced a huge jump in insolvencies.  Victoria, South Australia and Queensland have had a material increase whilst New South Wales has been relatively stable.

Worth an additional comment is the increase in Queensland with insolvencies up 24%. Whilst that is a concern, it is a far lower increase than say WA at 69%.  Anecdotally business conditions are poor in Queensland and many had expected a spike in insolvency numbers as a result of the floods earlier this year.

It is our expectation that the number of insolvencies will deteriorate in Queensland but that it has been delayed for two reasons: firstly, it always takes a number of months, if not years, for a negative event to reflect in business failure statistics and secondly, anecdotally, the ATO, which is a major catalyst for company liquidation, has been relatively lenient in Queensland.  Whilst the ATO has been more aggressive in pursuing long outstanding debts elsewhere, in Queensland leniency is still shown.