Banks’ loan default losses may top GFC: Macquarie Wealth

Banks which have loosened lending standards may face defaults triggered by coronavirus that exceed levels in the GFC, analysts warn.

Macquarie Wealth warns banks face “a considerable increase in loan losses”. Picture: AAP

Banks which loosened lending standards over the last two years amid record-low credit growth and during a period of ultra-low interest rates may be hit by loan defaults triggered by the coronavirus shutdown that exceed levels seen during the global financial crisis, according to Macquarie Wealth analysts.

Such a hit could force the vulnerable banking sector to seek to raise capital on the markets at a time when financial market volatility has already scuppered a number of capital raisings.

The warning from the leading brokerage comes after global ratings agency Standard & Poor’s said the local residential mortgage-backed securitisation sector was about to see payments dry up as a result of the newly-launched six-month loan repayment holiday launched by the banking sector for borrowers hit by hardship.

In a note to clients today, Macquarie analyst Victor German said lending standards were bound to deteriorate at a time of subdued credit growth and low interest rates, which was what had occurred just before the onset of the COVID-19 crisis.

“As a result, we believe an economic slowdown will potentially result in a considerable increase in loan losses,” Mr German said.

Macquarie said the threat to banking earnings could exceed its current level of expected impairments, which were below GFC levels.

“Should bank losses reach or exceed the GFC levels we expect it will lead to further substantial downgrades and potential capital raising,” Mr German said.

“While the ability to defer payments for three to six months across the banks will provide relief during this period, we note that losses will ultimately impact bank profits and losses as businesses are likely to fail, albeit at a delayed rate,” he said.

“If a significant downturn can’t be avoided, it is difficult to see how banks avoid a material increase in impairment charges and potentially require capital injections to ultimately restore their capital positions.”

Mr German said the government had changed its hostile stance towards the sector as the coronavirus-inspired economic shutdown threatened the health of the economy and the financial system, which has allowed the major banks to withhold the latest Reserve Bank rate cut from customers.

“Following a period of hostility between the government and the majors, it appears that the relationship improved in the last few weeks as the government is relying on banks to act as a conduit in supporting the economy,” he said.

“As both the government and the regulators appear to us to be falling over backwards to provide relief for the banking sector, banks’ pricing power re-emerged.”

Shaw and Partners analyst Brett Le Mesurier said the banking sector faced bad debt charges and credit losses of $34 billion over the three years through to 2022. That was higher than the $21bn worth of credit losses sustained by the major banks during the global financial crisis.

Mr Le Mesurier said mortgage loan losses had been rising since mid-2018. “This deterioration is forecast to accelerate as unemployment increases,” he said.

“The loss rates for the major banks were highest for unsecured personal and small-to-medium-enterprise credit exposures during the GFC and the next highest were in corporate.”