Banks extend loan relief as JobSeeker cliff looms

Banks will extend loan deferrals to help struggling customers that were facing a financial cliff come September.

Commonwealth Bank CEO Matt Comyn. Picture: Adam Yip

Banks have banded with regulators and the federal government to alleviate pressure over a looming financial cliff for struggling customers in September, outlining an extra four-month loan deferral period for those unable to restart payments.

The measures — which will be formally announced on Wednesday — provide more breathing space to those hardest hit by COVID-19, with as many as 779,458 loans on repayment pauses which amount to $236bn. The latest measures follow Victoria succumbing to a second wave of virus infections and imposing another lockdown.

The 10-month total deferral of repayments for households and businesses unable to restructure their debt or restart paying was facilitated by the banking regulator, which agreed to extend the favourable capital treatment of those loans. The initial repayment pause period was up to six months as the pandemic took hold in March, and some customers have already restarted repaying.

Banking analysts and economists had warned of a cliff-like scenario at the end of September, as government stimulus measures rolled off at the same time as loan repayment pauses.

Commonwealth Bank chief executive Matt Comyn told The Australian the deferral extension for those that really required it would reduce the disruption to the economy.

“Obviously the co-ordination of the government, particularly with APRA (Australian Prudential Regulation Authority), is trying to make sure it’s not a cliff and it is an orderly transition, and we want to be able to therefore direct support to customers who need it most,” he added.

“It (the Victorian situation) points to the difficulties and complexities of managing coronavirus, and how quickly things can turn and change. It’s too early to tell what the impact will be but clearly it’s a negative for the Victorian economy, and more broadly, given the size of the state.”

Mr Comyn stressed that Australia had fared better than expected but said the economy recovery would be “drawn out” and see challenging periods.

“The trajectory is going to be up and down but hopefully in the right overall positive trajectory from here,” he said.

The new loan measures follow Reserve Bank commentary on Tuesday that while the economic hit from the pandemic was not as severe as initially feared, the domestic economy was experiencing the biggest contraction since the 1930s. “Since March, an unprecedented 800,000 people have lost their jobs, with many others retaining their job only because of government and other support programs,” the RBA said, noting that a recovery would “be bumpy” and depend on containment of COVID-19.

An Australian Banking Association statement on the loan deferral extension said customers who could start repaying at the end of the initial six month would be required to. It noted the other options during the second phase of assistance included extending the loan term, converting to interest-only payments for a period, consolidating debt or opting for the additional four-month deferral.

NAB CEO Ross McEwan said Australians continued to endure an “unprecedented crisis” and the uncertainty for businesses and households was exacerbated by this month’s increase in COVID-19 cases detected.

“NAB is already checking-in with customers on deferment, to better understand their individual circumstances,” he added.

“While a significant portion of businesses and homeowners that we have spoken to have started their repayments again, there are clearly still many customers who may need support for a bit longer.”

Mr Comyn said while about 20 per cent of CBA customers on loan deferral arrangements had continued to make repayments, it was still too early to predict how many would need an additional pause on repayments after September.

“We’d like to think that the minority would need support beyond that date,” he said.

ANZ CEO Shayne Elliott said the extended loan deferral measure would help to manage an “orderly transition” as the economy adjusted to the end of certain stimulus.

“We’ve been working hard with the rest of the industry, our regulators and the government with the united objective of getting as many customers through to the other side of this pandemic,” he said.

“While this is clearly more difficult with the announcement large parts of Victoria will go back into lockdown, we want our customers across Australia to know we will continue to do all we can.”

Mr Elliott and several other big bank bosses have previously warned, however, that lenders should not be extending more credit or propping up businesses that are unlikely to emerge from the economic turmoil.

Ethical Partners Funds Management investment director Nathan Parkin said the introduction of any new support measures for bank customers had to be closely monitored, as lenders were probably pushing the problem further into the future.

“It is probably a smoother path, but it doesn’t remove the underlying issue,” he added. “It won’t change the bad debt position and it may mean there is more provisioning — it may just delay the recognition.”

The major banks have already set aside almost $5bn in anticipation of a COVID-19 spike in loan losses.

Westpac acting chief financial officer Gary Thursby said: “The COVID-19 pandemic is continuing to have a fast-changing impact here in Australia and we know that for some customers, this will have a longer-term effect on their circumstances. We anticipate that a significant number of customers will be able to resume regular repayments when their deferral term ends.”

The RBA said banks were continuing to draw on its Term Funding Facility, with the total to date about $15bn.