D-Day looms for banks over $224bn in loans

Commonwealth Bank of Australia CEO Matt Comyn (fourth from right) alongside Anna Bligh, the CEO of Australian Banking Association (second from right) during a meeting with Australian Federal Treasurer Josh Frydenberg (centre) and other banking executives in Sydney on Wednesday. Picture: AAP

Here’s a slightly awkward fact, for which there may be a reassuring, if elusive, answer: loans deferred because of the coronavirus recession total 90 per cent of the capital of the big four banks.

The deferred loans total $224 billion from 744,904 mortgagees and businesses according to the Australian Bankers Association – $165 billion in mortgages and $101 billion in business loans (which add up to more so there must be some overlap). Total equity capital of the big four is $251.5 billion.

Here’s another awkward way of thinking about the loan deferrals: impaired loan expenses of the big four in the latest financial year totalled $3.7 billion, or an average of 0.33 per cent of loans and advances.

If the deferred loans were treated as impaired this year rather than deferred, and the big four’s share of them was the same as their 80 per cent share of total loans and advances – probably a safe assumption – impaired loan expense would be 16.6 per cent of their loans and advances and would more or less wipe out their capital.

Are the loans impaired? After all, they would now be 90 days in arrears. Happily for us all the question doesn’t arise because repayments have been deferred, in line with what ABA CEO Anna Bligh says is the “banks working overtime to ensure assistance is given where needed to customers who are affected by this crisis.”

This is absolutely a good thing and a lifeline to those affected, no doubt about it – and none more so than the banks themselves.

If they were accounting normally for loan impairments and provisions for bad and doubtful debts there’s probably not much doubt the entire Australian banking system would be insolvent and the economy would be in a lot more trouble than it is now.

A problem deferred

But the problem has only been deferred. After six months, the support program runs out in September, at which point, it is assumed, $224 billion in loans, plus whatever is deferred between now and then, would instantly become 90 to 180 days in arrears.

To say the least, this would be a challenging event for bank boards, auditors and the Australian Prudential Regulatory Authority, as well as everyone else, unless of course everyone was back earning money again or else repayments from those in difficulty were still being deferred.

It is extremely unlikely to be all or nothing on that front in September/October, although the end of the JobKeeper allowance on September 27 and the end of the extra $550 per fortnight JobSeeker allowance on October 27 would be likely, you would think, to nudge the number still having to be deferred more towards the “all” than the “nothing”.

The deferrals were announced on March 20. It’s not clear from the announcements whether each loan deferral runs for six months from the time the deferral of it starts or whether the banking support package itself goes for six months and the deferrals all end together.

If it’s the latter, then the curtain comes down on September 20; if the former, it dribbles out over the next 12 months.

CBA’s balance date is June 30; the other three balance on September 30. In theory, all going well, the only one with an auditor problem is CBA because on June 30 the loans deferred between March 20 and March 30 would be more than 90 days due. The others would be OK because on September 20 all of the loans deferred on March 20 would all immediately start making repayments again.

One imagines that by then the auditors will have had a meeting with APRA and told the facts of life, but nevertheless at the very least they would have to qualify the audit with words like: “the ongoing solvency of the bank as a going concern depends on the ability of the customers whose loan repayments have been deferred being able to start repaying them again”, except in language far less clear.

Big questions in September

September is rushing towards the banks. How many of the 744,904 people and businesses, and counting, will be able to resume repayments? How long can loan deferrals go for? What proportion of the loans must be classified as impaired at September 30? What provisions must be struck for future impairments? How much capital would need to be raised to cover these sums? If it’s a 12-figure amount (that is, more than $100 billion), who will supply it?

Answer: the super funds, of course, after all they have $2.7 trillion, but they will drive a hard bargain, unless the government gives them a put option, or some other form guarantee.

It always comes back to the government, as it must, since it was the government that decided to close the businesses and throw the people out of work – and rightly so – to protect the nation’s health.

But if the government’s various income support packages end in September and October, as planned, the bank support will have to begin, or else the pandemic crisis will turn into a financial crisis like no other.

Alan Kohler is Editor in Chief of Eureka Report