With political leaders warning other COVID-19 outbreaks are likely, Slade says the key issue is managing the sheer level of uncertainty facing the bank and its customers.
“How do we get this balance, to make sure we support customers [and] try and manage the overall impact to the economy?” she says.
“But, of course, there is that recognition that there will be customers that won’t recover from this. We’ve added resourcing into the parts of the bank that deal with customers in hardship, and we’re working with customers on an individual basis to figure out when the right time is for them to make that shift.
“Because it’s not in our interest or their interest to keep them on a deferral if it’s clear to us and to them that they’re not going to come out the other side of it. We’re much better off moving to helping them work through other options.”
Her comments illustrate the challenge facing thousands of borrowers and a multibillion-dollar cloud of uncertainty hanging over Australian banks’ loan books.
Markets expect a rise in bad debts caused by COVID-19, but the extent of this increase will be a critical influence on profits, and therefore dividends, for the country’s biggest financial institutions.
Since the pandemic struck in March, banks have allowed some $266 billion in home loans and small business loans to be deferred as hundreds of thousands of borrowers have lost their incomes or been stood down.
The temporary measure has provided crucial breathing space for borrowers who watched their incomes evaporate overnight, but the cold financial reality is those loans continue to rack up interest.
There will be a limit to how long banks and regulators will allow the deferrals to continue, but there is also debate over what more banks and policymakers should do to keep people in their homes when the repayment pauses expire.
For bank investors, meanwhile, it adds up to even more uncertainty, which is predicted to weigh on returns from dividends for the forseeable future.
Banks around the world have formed a key plank in countries’ attempts to absorb some of the financial carnage unleashed by coronavirus by allowing borrowers to press the pause button on repayments.
After initially being offered for six months in Australia, the deferrals were this month pushed out to a maximum of 10 months, but banks stressed these extensions would only go to borrowers who really needed them.
About three months after most of the deferrals were granted, banks are conducting mandatory “check-ins” with borrowers, which is in itself a massive logistical effort that has required re-deploying and hiring hundreds of staff.
I think between September and January we will probably see a bit of a rise in properties on the market from people who have concluded that they won’t be able to make their repayments.
Martin North, Digital Finance Analytics
Any customer who can afford to resume repayments is being strongly encouraged to do so, while at the other extreme, bankers are having what they often call “difficult conversations” with borrowers in financial strife. Most of the customers with deferred loans fall somewhere between these two extremes, but all need to be assessed individually.
Just how many of near 900,000 deferred home loans, business loans, personal loans and credit cards will end up in trouble is a matter for debate, that will in part depend on the path of the virus.
Some more optimistic observers such as Atlas Funds Management chief investment officer Hugh Dive say that for all the economic uncertainty, Australia’s situation is still far better than most. This should protect banks from a catastrophic wave of bad home loans, he says.
“People will do whatever they can to keep their house. In previous downturns the bad debts have been not as much in mortgages than they have been in corporate loans,” Dive says. “I don’t expect a big ballooning in household bad debts.”
Others are more pessimistic. Digital Finance Analytics managing director Martin North says surveys he has conducted suggest about 40 per cent of the customers who have deferred their loans would struggle to resume repayments.
He says the extent of the problem will depend on structural unemployment – such as the recent permanent job cuts at large employers such as Qantas, UNSW and Deloitte.
Banks are already working on ways to help affected borrowers manage, whether it is through extending the terms of loans, selling other assets, only paying interest, fixing interest rates, or tapping into their superannuation. But there will be others, North says, who are encouraged to sell their property.
“I think between September and January we will probably see a bit of a rise in properties on the market from people who have concluded that they won’t be able to make their repayments,” North says.
While he does not expect mass foreclosures, which would not be in banks’ interests, North argues the extra sales of homes will weigh on property prices, and the recovery ultimately hinges on what happens to unemployment.
Against such grim predictions, some consumer advocates are highlighting the enormous costs to the community and individuals if families are indeed pressured into selling their homes.
People will do whatever they can to keep their house.
Hugh Dive, Atlas Funds Management
Tony Robinson, a former Victorian government minister and a director of Financial Counselling Australia, says current policies have worked so far but warns they won’t be enough when the current deferrals start expiring. He warns of a potentially catastrophic impact on stretched young families in the outer suburbs if banks act too aggressively to push borrowers to sell.
“There are some people for sure who may make the decision to sell. But if we end up with lots of people feeling they have no other decision but to sell, that will be a disaster,” he says.
“It seems to me logically we need some form of external unconventional support, which shares this risk around.”
Consumer Action Law Centre chief executive Gerard Brody also says banks must not treat this as a “business as usual” credit cycle. He says there are other ways to support customers in hardship beyond deferring payments, such as waiving revolving credit card debts or working with people until they are able to find employment. While acknowledging the financial realities at play, he says governments must play a role too.
“What we’ve been saying to banks and credit providers is that they’ve got to offer assistance that lasts as long as people need,” Brody says.
For bank shareholders, it adds more uncertainty. Bad debts are historically the major swing factor for bank dividends, which were already at stretched payout ratios before the pandemic struck.
But banks and the market cannot truly understand the condition of banks’ loan portfolios while borrowers are so heavily supported by government assistance. As part of what regulators called a financial “bridge” across the pandemic, banks are also receiving concessions that mean they do not need to treat deferred loans as being in arrears for capital purposes.
Jefferies banking analyst Brian Johnson says the market will not know the condition of banks’ loan books until all the government support expires, and this will depend on the economy’s ability to bounce back. “A bridge to nowhere is an upward-sloping pirate’s plank,” he says.
Regulators have also ordered banks to preserve their capital – which prompted ANZ and Westpac to suspend their half-year dividends. Johnson, who has an “underweight” stance on banks, believes dividends will either not be paid or offset by dilutive issuance of new shares through dividend reinvestment plans.
Given all the uncertainty about the economic outlook, some say it looks like a long road ahead for banks and their investors, rather than a quick bounce-back.
Investors Mutual portfolio manager Michael O’Neill says there is a case for conservatism from bank boards, and he tips dividend payout ratios will be between zero and 40 per cent. He says it could take until 2022 for returns and dividend payout ratios to return to more normal levels.
“I think banks are looking to conserve more capital rather than take the risk that they might have to raise capital at a future time,” O’Neill says.
Banks, for their part, have not given guidance on how many of the borrowers with deferred loans will be able to resume repayments. More details will be provided when the Commonwealth Bank reports its annual results on August 12, with others to provide quarterly updates in coming weeks.
CBA chief executive Matt Comyn this week said he was optimistic more people would resume making repayments, but he acknowledged most were too uncertain to do so at the moment.
NAB’s Slade stresses that every customer is different, which makes the process of checking in with each borrower to understand their circumstances “really critical.” “Every customer’s situation is different, so it’s working through that with them and of course encouraging customers to repay if they can, because that’s the best thing for them,” Slade says.
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Clancy Yeates is a business reporter.