Do banks think a huge number of Australians will default on their mortgages in coming months?
The major banks are setting aside billions of dollars for an influx of bad loans.
They are preparing for a tough period ahead, as Federal Government stimulus payments are gradually wound back and mortgage and business customers adjust to making regular loan repayments again.
But do the banks really expect thousands of Australians will be defaulting on their loans in coming months, putting bank balance sheets at risk?
Or are they just being cautious?
A sign of what’s to come?
Yesterday, ANZ Bank announced its unaudited full-year statutory profit had fallen 42 per cent this year, down to $3.76 billion.
Its results were dragged down by its decision to set aside $2.74 billion in preparation for potential losses arising from COVID-19 in the 2019-20 financial year.
It said 95,000 of its home loan accounts (in Australia) received emergency repayment deferrals this year, and as at October 15, around 43,450 were returning to regular repayments again.
But 40,000 home loan accounts were still under their initial deferral scheme, and 11,000 had asked for an extension to the scheme, while 550 had been transferred to the “hardship” category.
For its business customers, at least 1,600 accounts had recently received a four-month extension on their initial repayment deferral scheme (with 60 per cent of those accounts coming from Victoria).
ANZ’s chief executive, Shayne Elliott, said it was hard to predict what would happen in the next 12 months, and though he wasn’t expecting a rapid deterioration in his loan book, he was confident the bank had set aside enough to cope with a potential influx of bad loans in the new year.
“Events of the last 12 months make it difficult to predict the course of the next year,” he said.
“What I do know, however, is we are in excellent shape to navigate whatever challenges emerge.
“We want our customers to know we will continue to do all we can to support them through the tough times.”
ANZ’s chief financial officer Michelle Jablko said the wider bank had $5 billion in collective provision charges set aside for potential future losses, so its capital position was strong.
“That gives us quite a lot of capacity because the world is still uncertain and we don’t know exactly what’s going to come,” she said.
It begs the question: what are the other banks doing?
Westpac will release its full-year results on Monday, and National Australia Bank will follow on Thursday.
They are both expected to provide updates on the number of mortgage and business customers still receiving repayment deferrals, and how many customers have asked for extensions.
So we’ll have a better idea of things then.
But analysts from UBS — Jonathan Mott, Minh Pham, and Anna Woodcock — last week predicted Westpac would be putting aside more than $2 billion in preparation for potential losses arising from COVID-19, while NAB would be putting aside $1.5 billion.
They said Westpac’s most recent update on its loan deferral customers was generally positive. In its third-quarter update, Westpac had 77,500 home loan deferrals on its books (worth $30.4 billion, or 7 per cent of its total home loan balance), which is much lower than its competitors.
NAB’s third-quarter update showed it had 86,000 home loan deferrals on its books (worth $35 billion or 12 per cent of total housing loan balance).
What about Commonwealth Bank?
It revealed it had more than doubled the money it had set aside for bad loans due to COVID-19 to $2.5 billion.
In total, it made provision for $6.4 billion of bad and doubtful debts and said there were a total of $8.7 billion worth of loans that were “troublesome or impaired” linked to businesses in a range of industries including transport and storage, manufacturing, and retail and wholesale trade.
At the time, CBA’s chief executive Matt Comyn said he was still upbeat about Australia’s economic outlook, because the economic contraction hadn’t been as bad as first anticipated.
Does that mean banks expect thousands to default on their loans?
No, they are not forecasting that to happen.
They say they are being exceptionally cautious.
However, as the economy slowly moves into its recovery phase and the Federal Government continues winding back its stimulus payments, things will be touch-and-go for a while.
There’s a risk the stimulus payments could be wound back prematurely. There’s a risk COVID-19 could flare up again. There are many risks.
The banks will be watching every development closely.
What are bank analysts saying?
UBS’s analysts have warned their clients to be wary of the profit results from major banks this reporting season.
They said the banks had been operating in a “false economy” this year, so it was harder to predict the future.
As they put it, almost half of Australia’s labour force has been on wage subsidies, unemployment benefits or employed by the Government this year. There have been mortgage deferrals and loan deferrals for small and medium-sized businesses. There has been rental relief. And much of Victoria has been under lockdown for months.
“Therefore, it is extremely difficult for the banks to gauge the quality of their books or provisioning,” the analysts warned.
“Banks will again be forced to estimate expected losses in various scenarios, which is merely an educated guess on an Excel spreadsheet.
“Actual losses won’t emerge until . As a result, 2020 numbers and 2021 outlooks should be treated with caution.”
They also warned banks might have to set aside even more money for potential bad loans next year.
“This is partly timing, as we are in an information void during [the second half of 2020] as to how the tail of deferred loans will perform after the repayment holiday ends,” they said.
“[Provisioning] charges in 2021 remain hard to predict and are a function of a vaccine, speed of recovery, opening of borders and asset prices.”