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International rating company, S&P Global Ratings recently said that the Australian banks are likely to captivate the rise in credit losses and disruption to funding markets caused due to the coronavirus outbreak, devoid of presenting any instant or substantial risks to the banks’ creditworthiness.
The coronavirus pandemic that is weighing heavy on economies across the globe is already placing the burden over the governments and central banks. Governments are engaged in devising measures on every front like economic and social, to cope with the alarming situation.
Central banks have already lowered interest rates across countries, including Australia, the US, New Zealand and Canada. Interest rates have been lowered as an emergency measure to tackle the escalating worries due to coronavirus.
Other than the travel and tourism sector, banks and financial institutions remain at a higher risk. Financial markets have witnessed one of the worst times with trillions of investors’ wealth wiping off in a pop and drop movement of the market.
Rebound in GDP Growth
S&P anticipates lower than expected growth in the Australian GDP and expects the same to rebound in 2021. Similar predictions were made by the RBA where it said that the Australian GDP growth is likely to remain noticeably softer than earlier expected, as the duration and magnitude of the prevailing situation remains unpredictable.
The RBA has acknowledged the depreciating Australian dollar, long-term government bond yields that have fallen to record lows and the high volatility in the financial market. RBA stated that it would maintain ample liquidity in the Australian financial system and believes that the Australian financial markets are operating effectively.
Credit Losses Expected to Double
The rating agency further anticipates that the coronavirus outbreak might cause credit losses to the Australian banks to nearly double during 2020 from historic lows in 2019 reaching around 30 basis points of gross loans and advances.
However, S&P expects that the Australian credit losses shall remain lower as compared to the international peers as well as S&P’s expected long-term averages.
Despite headwinds from low and declining interest rates, expectant decrease in demand for credit, and progressive customer remediation costs in relation to governance lapses in recent years, S&P believes that the profitability of the Australian banks to stand tolerable to absorb increased credit losses.
Moreover, Australian banks are also believed to maintain a stretch in their earnings for captivating an increase in credit losses that goes beyond the S&P’s revised forecast not giving rise to any significant risks to their creditworthiness.
Business Loans to Contribute for Credit Losses
As speculations were already a hot selling item in the news, the companies in the travel, hospitality, retail services, and transport-related sectors have already declared material impact of coronavirus on their businesses. Witnessing the severity of the situation and the slowdown in the business, companies have revised their earnings guidance as well as made significant changes to the normal business schedule.
Based on the likeliness for the above-mentioned sectors to take a more severe hit, S&P expects that business loans in Australia is likely to contribute to most of the initial increase in credit losses for the Australian banks.
Weakening Consumer Sentiments
Prior to the coronavirus outbreak, the Australian economy has been a host to several major natural disasters like the recent bushfires and storms. The natural disasters together is expected to further rein in the existing weaker consumer sentiments and business confidence.
The coronavirus outbreak and correlated collapse in financial markets have had a significant influence on consumer sentiments, which is reflected by the Westpac-Melbourne Institute Index of Consumer Sentiment that dropped 3.8% to 91.9 in March 2020 from 95.5 in February 2020.
Westpac believes that consumers are adopting a more balanced approach to deal with the situation and are concerned about the near-term outlook for the economy.
Stimulus Package Likely to Support Economic Outcomes
S&P anticipates a relatively smaller impact on the Australian banking system in the short term supported by long-term economic prospects and projections in economic growth with the passage of the coronavirus outbreak.
Moreover, the Australian Government had announced a $17.6 billion economic plan as a temporary measure in order to respond to the immediate challenges faced due to coronavirus impact.
Anticipations are being made that this fiscal stimulus announced by the Australian government, where up to 6.5 million individuals and 3.5 million businesses would be directly supported by the package, is likely to assist short-term economic outcomes.
How prepared are the Banks?
As the situation only intensifies, there seems to be no near-term relaxation in the tightening regulations for businesses to operate. Amidst the outbreak of COVID-19, spreads on Australian bank debt have widened in recent weeks, while the S&P believes that the major Australian banks are sufficiently positioned to compete with a momentary disruption in their access to offshore wholesale funding.
Few points that highlight the preparedness of the banks are as follows:
- Since a large part of the banks’ offshore borrowings remains short term, S&P believes that these banks have considerably achieved their wholesale term-funding for the financial year.
- If needed, major Australian banks have a void zone and capacity to issue covered bonds to supplement their funding.
- The balance sheets of the banks also reflect a fair level of liquid assets.
- Access to the RBA’s Committed Liquidity Facility by the banks which was set up after the global financial crisis to assist Australian banks in meeting unanticipated cash flow needs.
- RBA has indicated its preparedness to support the liquidity of the secondary bond markets in Australia and has plans to carry out longer-term repurchase operations of six-months maturity or longer at least weekly if market conditions permit.
What is expected?
Due to geographic proximity and likely better understanding of local operating conditions, Australia-based fund managers are likely to choose debt issued by Australian banks in preference to offshore investments.
- With retail customers likely to become more risk-averse, a larger proportion of new savings will accrue to the Australian banks in the form of customer deposits.
- Australian banks would show forbearance to the temporary strain placed on household and business borrowers, like the recent interest rate cut by the RBA despite persistent pressures on their interest margins and earnings headwinds.
The CEO of Australia and New Zealand Banking Group Limited (ASX:ANZ), Shayne Elliott believes that the that ANZ and the banks in Australia as an industry in a great position in terms of strength have never had more capital and liquidity. He further added:
“And so that's why I think you take some, some indications of the time periods required, and the financial strength we have. This is, we're in a great position to do the right thing and see our customers through this difficult period.”
Worsening market situations across the globe are placing companies and banks in unlikely situations of withdrawing guidance, and bank capital notes offer. For instance, Macquarie Bank Limited had withdrawn its offer of $A500 million of Macquarie Bank Capital Notes 2 in light of significantly changed market conditions in recent weeks.
In a similar fashion, National Australia Bank Limited (ASX:NAB) also withdrew its offer of NAB Capital Notes 4 citing the ongoing market volatility that could possibly impact the trading value of the NAB Capital Notes 4.
Currently, anticipations are in place made for a fall in the economic activity globally along with weak business and consumer confidence that is likely to fuel the confusion in the equity market and deteriorations in the Australian economy.
