The big four banks are expected to lose up to $30 billion, as the “team Australia” mantra sees loan deferral payments for businesses and mortgagors take billions off the banks' bottom line.
In a new analysis, S&P Global Ratings has reported that credit losses for the big four banks will be six times larger than in 2019 as the pandemic means businesses and households are unable to meet payment requirements in the future.
In our base case, we now forecast that the Australian banks’ credit losses in the year to 30 June 2021 will rise to about 85 basis points of gross loans and advances (totaling about $29 billion for the entire Australian banking system), nearly six times from their record low in fiscal 2019.
The 85 bps increase, which is expected to moderate to 50 bps in 2021, amounts to approximately $29 billion in gross loans, nearly six times higher than the record low in FY19.
According to S&P, much of the deterioration in credit quality would come after social distancing measures have been lifted, adding that borrowers would enter hardship in the absence of fiscal support and loan relief measures.
“We expect that a number of businesses and households are likely to struggle to meet their financial obligations once the restrictions to contain the coronavirus outbreak are lifted, when the moratorium on debt servicing ends, and the government reduces fiscal support,” S&P noted.
Major banks well placed to absorb increased credit losses within earnings
S&P Global Ratings’ Scenario and Sensitivity analysis suggests that “Australia’s major banks retain sizeable headroom within their earnings to absorb our forecast increase in credit losses in conjunction with a large contraction in interest spreads and fee income”.
The news comes as two of Australia’s big four banks announce major cash profit falls due to the deferral of loans and credit risks.
ANZ’s cash profits fell 62 per cent, while statutory profit after tax fell 51 per cent, driven primarily by credit impairment charges of $1.674 billion that included increased credit reserves for COVID-19 impacts of $1.031 billion.
“This was a reasonable result, given the tough trading conditions being experienced before the crisis hit,” said CEO Shayne Elliott. “We maintained our focus on productivity and continued to target balance sheet growth in our preferred segments. Loan losses heading into March were at historically low levels, and we are well positioned to manage the higher credit charges taken as a result of COVID-19.”
NAB’s cash earnings fell 51 per cent to $1.44 billion from 1H19 as credit impairment charges increased to $1.161 billion. Half-year charges included $828 million of additional collective provision forward-looking adjustments, of which $807 million reflects potential COVID-19 impacts.
“Our result for the half-year ending 31 March has been materially impacted by the COVID-19 pandemic, with cash earnings (ex. large notable items) declining 24.6 per cent relative to the first half of 2019,” CEO Ross McEwan said in a letter to shareholders. “We entered this crisis in a robust position, with our capital significantly strengthened over recent years.”
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