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Australian banks reinstate loan deferrals, but impact on earnings may be limited

Australia's major banks may escape the drag on their earnings from once again having to allow customers to defer their loan repayments, after the nation's banking regulator said the delay will not count as arrears or debt restructuring.

The Australian Prudential Regulation Authority, or ARPA, on July 19 announced fresh regulatory support for borrowers affected by the pandemic as rising cases of the new Delta variant of COVID-19 forces lockdowns in several parts of the country. Lenders, including the big four banks — Australia and New Zealand Banking Group Ltd., National Australia Bank Ltd., Commonwealth Bank of Australia and Westpac Banking Corp. — have started giving borrowers the option to defer their loan repayments. The new relaxation will be available for three months and is similar to the temporary relief measures that ended March 31, APRA said.

"Major banks will remain profitable and have substantial buffer in their earnings to absorb losses," Nico De Lange, an analyst at S&P Global Ratings said. It may be too early for the lockdowns in Sydney and Melbourne to lead to higher individual provision charges, but "we assume an increase in deferrals should drive a conservative approach to provisions."

The risk that the Delta variant of the disease could disrupt the post-pandemic economic recovery has contributed to a sharp decline in stocks and a U.S. dollar rally. The global impact on markets may, however, be only temporary, analysts say. Australia's banks face higher funding costs but may be well placed to absorb the impact if the economy rebounds. Banks' earnings have improved and capital ratios are comfortably above the regulatory requirements, giving the lenders adequate buffers against a temporary setback due to the virus. Still, the pandemic represents a risk for the lenders.

Easing the burden

Commonwealth Bank said it will extend the freeze on foreclosures it announced in November 2020, allowing customers that are significantly impacted by the latest COVID-19 restrictions to stay in their homes until at least February 2022. The bank also offered home loan customers access to a two-month deferral on their home loan repayments. Westpac is offering three-month home loan deferrals, while NAB is offering deferrals on a month-by-month basis. ANZ announced support for retail customers with short-term payment relief or restructuring home loan debt.

"We believe that loan repayment deferrals offered by the Australian banks, along with the fiscal and policy support by the authorities, cushioned the blow to the borrowers from COVID-19-related stresses. We expect these measures to play a similar role if the banks and authorities respond in a similar way with the emergence of new waves of infections," said Sharad Jain, an analyst at S&P Global Ratings.

The Australian Banking Association, a lenders' trade group, on July 8 announced a national support package for all small businesses and home loan customers impacted by the current lockdowns. The support includes up to three-month repayment referrals for business banking loans to small business customers.

"Banks are basically using the same playbook which helped Australia pull through the worst of the lockdowns last year with very little increase in home loan defaults," Nathan Zaia, equity analyst at Morningstar, told S&P Global Market Intelligence in an email. "The more customers the bank can keep from defaulting due to temporary changes in income levels, the better for their bottom line, and the better experience for its customers," Zaia said.

The new measures come as two states are in lockdown to arrest the spread of the new COVID-19 variant. Victoria has extended its lockdown for seven days from July 20, while South Australia announced a weeklong lockdown, Reuters reported. Sydney has been in a five-week lockdown. The state of New South Wales, which has Sydney as its capital, has reported over 1,400 cases since the first reported positive case June 16, The Sydney Morning Herald reported.

"Lockdowns obviously cause households a lot of stress, and not having to chose between putting food on the table or making a loan repayment is welcome," Zaia said.