Australia regulator says banks must provision for virus loan holiday

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SYDNEY (Reuters) – Australia’s banking watchdog on Monday said lenders must account for possible loss from the loan repayment holidays they offered borrowers affected by the coronavirus last week, to ensure banks keep stakeholders informed of action taken amid the outbreak.

The Australian Prudential (LON:) Regulation Authority (APRA) said banks must publicly disclose the volume of such loans as well as the nature and terms of any repayment deferral. Banks do not need to classify the loans as being in arrears, APRA said.

Measures to combat the health and economic impact of the outbreak are threatening the A$3.9 trillion ($2.24 trillion) loan books of the country’s four largest banks that dominate 80% of the market.

Last week, the banks announced coronavirus support packages that provide affected borrowers – mainly small businesses and home loan customers – with an option to defer repayment for up to six months.

Shares in Commonwealth Bank of Australia (AX:), Westpac Banking Corp (AX:), National Australia Bank Ltd (AX:) and Australia and New Zealand Banking Group Ltd (AX:) have fallen as much as 31% to 42% in the month since coronavirus cases began spreading beyond China, the virus’ country of origin.

Their shares were 7% to 10% lower in Monday morning trade, while the broader market () was 5.8% lower.

The government and regulators have also provided banks with several tools to ensure they can keep funding Australians who, just as in the rest of the world, have been forced to abruptly halt economic activity.

The measures for banks include an emergency interest rate cut, A$90 billion in ultra-cheap 0.25% funding for three years for small business loans, and a guarantee of up to A$20 billion on business loan losses.

Banks have not passed on the emergency rate cut to variable home loan customers, nor the ultra-cheap funding to businesses in full. Instead, they have agreed to provide the option to defer loan repayment for six months and capitalize the interest, lowered some loan interest rates and raised selected deposit rates.

Driven mainly by impairment in business loans – about a quarter of the four banks’ loan books – the banks are likely to see bad debt charges of A$15 billion to A$20 billion in the next 12 months, or about 0.33% to 55% of total loans, analyst estimates showed.

By not passing on the lower rates in full to the majority of customers, the banks are able to protect their profit, analysts said.

“We estimate that the benefit from no pass-through to home loan borrowers offsets the higher repricing on some small business loans, the drag from low cost deposits … and increase to term deposit pricing,” said analysts at JPMorgan Chase & Co (N:).

APRA said it will advise banks of the specific reporting treatment for loans that are subject to support arrangements.

With one of the highest coronavirus testing rates, the number of positive cases in Australia has surpassed 1,000 with the two most populous states of Victoria and New South Wales recording the most infections.

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