APRA Delivers Some Welcome Relief To Banks

Australia | Jul 14 2020

An extension of repayment deferrals by APRA is considered timely, providing some relief to the banking system as government stimulus winds down from September.

-Higher proportion of SMEs have taken up deferrals versus retail customers
-Little disclosure on the degree of stress being experienced
-More opportunity for banks to restructure loans


By Eva Brocklehurst

While Australia's management of the coronavirus pandemic has been comparatively well received in a global setting, enabling the economy to re-open somewhat, the recent outbreak in Melbourne is a significant setback.

Given Melbourne is Australia's second largest city, with around 20% of the population, and contributed 40% of GDP growth in 2019, the impact on the economy is likely to be substantial, UBS asserts.

So, what is likely to be the effect on the banking system? The latest announcement by APRA is considered timely, therefore, providing some relief to the system as the commonwealth government stimulus and JobKeeper payments end in September.

APRA has granted an extension of the repayment deferrals for bank customers, allowing deferrals to cover a maximum period of 10 months from the start of the deferral or, under special circumstances, until March 31, 2021.

Qualification for deferral extensions has been tightened, as up to half of the current loan deferral borrowers have been able to make repayments and the phase 2 extension will be limited to borrowers with a "genuine need".

Citi suggests the announcement is a significant concession that should help manage the economic impact of the Melbourne lockdown, the winding down of fiscal stimulus and superannuation withdrawals. It should also help ongoing disruption for key sectors such as tourism & hospitality.

Banks have been advised to encourage customers to go back to making full repayments if they can, and to do so before the end of September/October. For those with ongoing financial difficulties, banks will seek to facilitate a return to payments through restructure or variation of the loans.

If such arrangements are not in place at the end of six months, customers will be eligible for an extension for up to four months. JPMorgan is not surprised by this development, given the lingering impacts from the pandemic and the need to avoid a "financial cliff" around the end of September.

APRA has indicated a much higher proportion of small-medium enterprises (SMEs) have taken up deferrals, compared with retail customers. There was also an additional $36bn of loans approved for deferral in May, although the pace of additional deferrals has slowed dramatically since April's $100bn.

Around 20% of borrowers on deferrals are still making full or partial repayments. Still, Morgan Stanley points out the number of borrowers making some form of repayment is falling and loan deferrals will continue to grow.

By value, all banks have roughly similar portions of their home loan books in which repayment holidays were approved. And, not surprising, SME customers are the most affected.

JP Morgan estimates National Australia Bank ((NAB)) has a higher proportion of deferred housing and SME loans, all of which account for around 10.5% of total Australian loans. There has been little disclosure on the degree of stress being experienced by borrowers and limited information on customer circumstances that have resulted in deferred repayments.

While the disclosures are a step in the right direction there is not enough information on the number of borrowers who are unemployed, furloughed or receiving JobKeeper, the broker highlights.

Capital Treatment

APRA has also announced regulatory relief around capital treatment of loans will be extended and the loans that are restructured prior to March 31, 2021 will be treated as performing for capital & reporting purposes.

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