You may have heard this week about the big decision by our banks.
The Australian Banking Association (ABA) has decided to extend its ‘loan holiday’. Admitting that cutting the deferred loan repayments policy in September would be unwise.
If you haven’t done so already, you can check out yesterday’s Money Morning for all the details. My colleague, Lachlann Tierney, surmised the situation perfectly.
Needless to say, the banks are now stuck in a quandary.
Their generosity has quickly become a liability. With many of these deferred loans now at risk of becoming terminal risk.
After all, the policy was designed to be transient. A reprieve to help many Aussies through a brief rough patch.
Now though, everyone is getting a little more unsure as to just how ‘brief’ this downturn will really be.
Victoria’s second wave has put a dampener on the whole nation. With the government already preparing its next round of stimulus. Which, funnily enough, will include an extension of the JobKeeper program as well.
And this is precisely the problem. For both the banks and the government.
They have no idea how to wean our economy off of these handouts.
Act too quickly and they risk plunging our economy into a hard recession, perhaps even a depression.
Act too slowly though, and the handouts will never go away. We’ll be like the toddler that still needs their pacifier.
Either way, someone is going to end up in tears.
Their own worst enemy
It is as clear as day that the Aussie big four banks can’t keep up this farce.
Pushing back the loan holiday wasn’t what they wanted, but it was what they had to do. Their kindness has become their biggest weakness.
That was made painfully apparent in separate press releases from NAB, ANZ, and Westpac. Take this snippet from ANZ:
‘Customers on existing loan repayment deferrals who have not been financially impacted by COVID-19 will be required to begin making normal repayments at the conclusion of their six-month deferral agreement.’
As critical as this scheme has been for many Aussies, the banks simply can’t afford to keep it going. The $260 billion worth of loans on hiatus needs to start being repaid. Otherwise it could be bye-bye for the banks.
Here’s the thing though, getting the people who can pay to start paying is going to be a nightmare. I guarantee it.
There is no quick fix to remedy this policy. If there was, the banks would have already pulled the trigger.
That’s why they released these press statements. Because they know that getting people to start repaying is going to be a painful process.
As for the people taking advantage of the banks’ ‘kindness’, well I can’t blame them entirely.
We are still coming off the back of that notorious royal commission. One that showed just how unscrupulous and vile the banks could be at the worst of times.
In a way, this feels like karma. A chance for people to get even with the banks.
I’m not saying it’s right. I’m simply trying to delve into the machinations of why some people may be avoiding repayments.
Keep in mind, these are the customers that the banks need the most right now too. Because at the very least, even if they’re avoiding repayment, these are customers who can pay.
The far more worrying group are those who will get the extended loan holiday. Because in my eyes, and many other analysts’, they may as well be classified as bad loans.
Kicking the can
Now, we obviously don’t know how many of these bad loans there are. Or, how much they amount to.
After all, if the banks are lucky, most people will start repaying.
Like I said though, getting that process started is already going to be costly. Both in time and money.
If, however, these bad loans make up a sizeable portion of the $260 billion, then it will obviously be far more painful.
Obviously, we could speculate all day on this matter. But until we get the actual data it doesn’t really mean all that much.
All I will say, is that if the banks weren’t worried, they probably wouldn’t have said anything.
We’ve already seen each of the Big Four set aside money for write-offs. So, they were clearly expecting to absorb some losses.
But the fact that they’ve had to extend this policy and specifically call on people to start paying, suggests things may be worse than they first thought.
That is a worrying possibility for the banks and their shareholders. An outcome that would only further their recent pain.
I don’t need to tell you just how hard 2020 has already been for the Big Four. A quick google search of their share price history will tell you all you need to know.
By pushing these loans back even further though, the risk will only continue to grow.
The banks seem to be hoping that some economic miracle will swoop in and save them. That is not the kind of chance that I, if I were a shareholder, would be happy with.
Indeed, the only miracle the banks will likely get is from the RBA. A bailout — not that they’d ever call it that — to ensure they don’t go under.
Needless to say, things aren’t boding well for the banks.
And they are at risk of becoming something far worse than insolvent.
This one act of mercy may have just made them a terminal risk.
So, if I were you, I’d be maintaining a healthy social and capital distance from the Big Four. Because however this farce comes to an end, it won’t be a good look for the banks.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.