Australia’s loan deferral helps borrowers, but could dampen bank profits

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The Australian regulator’s decision to allow borrowers to defer repayments for another four months will help cushion the blow of the COVID-19 pandemic on them, although its impact on bank profits will not be known until later. analysts said.

The Australian Prudential Regulatory Authority extended on July 8 temporary treatment of capital for bank loans with deferred repayments and adjusted the treatment of capital for loans with changed or renegotiated terms to a maximum term of 10 months. Customers who can resume repaying their loans will be required to do so at the end of the initial six-month deferral period on September 30. But borrowers with reduced income and continuing financial hardship due to the novel coronavirus outbreak may apply for extension.

Australia expects the economic slowdown from the pandemic to persist and its unemployment rate to approach 8% by September, which could lead to an increase in bad debts once the moratorium ends. This would put pressure on the capital position and profits of local banks which are already facing significant increases in credit provisions, falling interest rates and moderate credit growth. The unemployment rate rose to 7.1% in May from 4.9% at the end of December 2019, according to government data.

Sharad Jain, analyst at S&P Global Ratings, said the effect of the disease on the asset quality of Australian banks would become clearer when moratoria on loan repayments end and the government cuts its budget support. “A number of heavily indebted households and businesses are likely to have a hard time meeting their financial obligations at that time, in our view,” Jain said.

Meanwhile, the extension can give banks more flexibility in handling potential losses, as they would not have to treat deferred loans as past due. australia the big banks expect that many customers will be able to start repaying after the current moratorium ends.

“WWe anticipate that a significant number of customers will be able to resume regular repayments at the end of their deferral period, ”said Westpac Banking Corp. Interim CFO. Gary Thursby in a July 8 statement. Australia and New Zealand Banking Group Ltd. CEO Shayne Elliott said many clients found their income was not as impacted as they initially thought and paid back already.

“This The next phase of bank support will avoid a ‘cliff’ for customers in September and give them the breathing space they need to work with their bank and get back on their feet financially, ”said Anna Bligh, CEO of the Australian Banking Association.

Data from the banking industry association shows that banks had accepted nearly 780,000 deferral requests for a total of A $ 236 billion in deferred loans as of June 19. Of this total, over 485,000 were deferred mortgages. The association suspended collection of deferral data, but showed that the rate of new relief requests had stabilized.

Bell Potter analyst TS Lim said the delay “is the price to pay for doing business in Australia” for banks. “Banks are a proxy for the economy and stifling the economy would be counterproductive, ”he said in comments emailed to S&P Global Market Intelligence.

Banks have already increased their provisioning for these loans in anticipation of increasing arrears and write-offs, while some customers are starting to repay their loans and most are still ahead in terms of repayment, Lim noted. “This would hopefully neutralize the impact of extending the loan holiday period,” he said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

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