Bank shares drop on extension to loan deferrals, APRA on deck till March 31

Shares in big banks fell amid jitters over extended loan repayment pauses, as APRA locked down new arrangements until March 31.

APRA Chairman Wayne Byres. Picture AAP: Image/David Crosling

Major bank share prices were pushed lower on Wednesday on investor jitters about the extension of loan repayment pauses and pressure on dividends, as the banking regulator locked down its treatment for repayment deferrals until March 31.

The banks have banded with regulators and the federal government to avoid a looming financial cliff for struggling customers in September, and outlined an extra four-month loan deferral period for those unable to restart payments due to COVID-19.

But risks of higher loan losses and dwindling dividend payments -- ANZ and Westpac have deferred interim dividend decisions while National Australia Bank slashed its payment -- weighed on bank stocks.

The largest lenders all saw their shares drop in trading on Wednesday, with ANZ and NAB leading the declines with falls of 2.1 per cent and almost 2 per cent respectively. That was followed by shares in Westpac which slid 1.8 per cent, while Commonwealth Bank was down 1 per cent.

UBS banking analyst Jonathan Mott said he continued to have a positive view on the banks’ recovery, but noted risks linked to the pandemic and a second outbreak were increasing.

“If the outbreak spreads outside Victoria (especially into NSW) requiring more of the country to go into lockdown, we think FY21 earnings and dividend recovery are at risk,” he told clients on Wednesday. “We continue to have a positive view on the banks given expectations for a recovery in return on equity to about 9 per cent and increase in the payout ratio.”

UBS also questioned the Australian Prudential Regulation Authority’s treatment of deferred loans, which means they are not required to classify the repayment pauses as a period of arrears and therefore hold more capital against those loans.

“We continue to believe the market will look through any reclassification to calculate ‘real NPL (non-performing loan)’ and ‘real CET1 (common equity tier one)’ ratios.”

UBS expects loan impairment charges across the big four banks will balloon to $26.9bn over the two years ended September 30, 2021.

The big banks have already set aside almost $5bn for an expected spike in COVID-19 related loan losses.

There are 800,000 loans -- across households and businesses -- that have sought loan repayment pauses, totalling about $260bn. About half of the total are expected to start repaying loans after September, while the others have options including restructuring debt, moving to interest-only payments or taking up the extra four month repayment pause.

The initial period of banks not requiring repayments was for up to six months, and was due to expire at the same time as federal government stimulus such as the JobKeeper wage subsidy.

APRA on Wednesday confirmed it would write to banks this week, advising its regulatory approach for loan repayment pauses would be extended to cover 10 months. That will be in place from the start of a repayment deferral, or until March 31, 2021, whichever comes first.

“These measures are designed to incentivise ADIs (authorised deposit taking institutions) to continue to support their customers through an extended period of uncertainly, while at the same time facilitating the restructure of eligible loans in a measured and timely manner,” APRA chairman Wayne Byres said.

“We are fortunate that the Australian banking system has the balance sheet strength to be able to provide ongoing support to customers temporarily impacted by COVID-19. This will help to avoid unnecessary hardship and foreclosures.”

The regulator wants banks to have a “comprehensive plan” to show how they will work through the large volume of impacted customers and avoid operational constraints.

The new measures come as Melbourne was forced into a new period of lockdown due to a sharp increase in COVID-19 cases.

In a Blenheim Partners’ podcast, to be made public on Thursday, Australian Small Business and Family Enterprise Ombudsman Kate Carnell outlines the highly challenging period ahead for businesses, with many unlikely to survive.

She said 193,000 Australian small businesses had collapsed in the fallout from the global financial crisis.

“That was minor, really minor, in comparison to this. In terms of the impact upon small business,” Ms Carnell added.

Bell Potter analyst TS Lim labelled the extension of loan repayment pauses as the “price the banks pay” for having a banking or social licence.

“The banks are a proxy for the economy and it would be counter-productive not to defer these loans,” he said.

MST Marquee senior analyst Hasan Tevfik said he expected the banks to endure an “L-shaped” recovery, with profits not returning to 2019 levels for several years.

APRA will require banks provide regular disclosures on deferred, restructured and impaired loans. The regulator also plans to publish monthly aggregate data on loans subject to repayment deferrals.

Australian Banking Association chief Anna Bligh said the extended loan repayment pauses avoided a financial cliff for customers, which would also have been “catastrophic for the economy”.

“For those, and there will be many of them, who are unable to return to full payments a further deferral of up to four months will be offered by banks on a case-by-case basis.”