Powered by MOMENTUM MEDIA
the adviser logo
Borrower

Loan relief to disguise ‘true’ credit impact of COVID-19: S&P

by Charbel Kadib6 minute read
S&P Global Ratings

Mortgage relief assistance provided to borrowers in the wake of the COVID-19 pandemic would hide the “true effects” of the crisis on credit quality, according to S&P.

S&P Global Ratings has published its latest arrears statistics, reporting that over 30-day delinquencies underlying Australia’s prime residential mortgage-backed securities (RMBS) increased to 1.41 per cent in February, up 4 basis points from 1.36 per cent.

To continue reading the rest of this article, create a free account
Already have an account? Sign in

Arrears rose across all states and territories, with the exception of Tasmania, where the delinquency rate fell by 1 basis point to 1.09 per cent.

According to S&P, the deterioration in credit quality was mostly driven by a rise in arrears across the eastern states of NSW (11 bps), Victoria (6 bps) and Queensland (8 bps), which are home to the largest volume of residential mortgages.

Advertisement
Advertisement

The ratings agency said this reflected the impact of the bushfires and drought, as well as a “decline in international tourism in larger coastal areas after the onset of the COVID-19 pandemic”.

However, in overall percentage terms, arrears remain highest in Western Australia (2.90 per cent), followed by the Northern Territory (2.79 per cent), Queensland (1.79 per cent), South Australia (1.40 per cent), NSW (1.39 per cent), Victoria (1.32 per cent), the ACT (1.11 per cent) and Tasmania (1.09 per cent).

S&P said it expects delinquencies to continue rising over the coming months in response to the economic fallout from the ongoing COVID-19 crisis.

But the ratings agency noted that the full extent of the impact on RMBS quality would not be known until figures for the month of April are released, given that social distancing measures were imposed in mid-March.

S&P added that loan relief provided by lenders would also hide the full extent of the deterioration in credit quality.

“The true effect of increased financial hardship due to COVID-19 will not be reflected in traditional arrears reporting until at least the third quarter of 2020,” S&P noted.

“This is because lenders are not required to report loans under COVID-19 arrangements as being in arrears during the defined mortgage-relief period.”

However, the ratings agency observed that some lenders are adjusting their reporting systems to monitor the volume and duration of COVID-19 hardship applications.

S&P revealed that based on initial observations from data provided by some lenders, around 3-7 per cent of loans in securitised trusts are under COVID-19 hardship arrangements.

The level of borrowers receiving hardship arrangements is expected to increase in the coming months, but S&P noted that the rate of increase would likely slow and would depend on the “economic path to recovery”.  

“The large forecast increases in unemployment for 2020 will lead to rises in arrears and defaults in the next 12-18 months, albeit from low levels,” S&P added.

“Mortgage payment relief measures will help to cushion some of the effects of rising unemployment on households’ debt serviceability – a longer path to economic recovery could diminish the efficacy of these measures over time, though.”

S&P acknowledged that a “high degree of uncertainty” remains about the longevity of the COVID-19 crisis, but said its forecasts reflect government projections of a mid-year peak.

According to a recently published Scenario and Sensitivity analysis from S&P, credit losses across Australia’s banks are set to “more than triple” in the 2020 calendar year in response to the economic fallout from the COVID-19 pandemic.

S&P’s base case is for credit losses across Australia’s banks to rise from 0.14 per cent in 2019 to 0.5 per cent in 2020.

The ratings agency said economic consequences form the coronavirus outbreak would be compounded by “second-order” effects from natural disasters in late 2019 and early 2020.  

S&P, along with other ratings agencies, recently downgraded their issuer credit ratings for Australian banks, including the big four.

Fitch Ratings and Moody’s Investors Service have also revised their outlooks on the operating environment for banks in both Australia and New Zealand from “stable” to “negative”.

The mortgage industry is preparing for a material rise in credit losses, with several banks, non-banks and mortgage insurance providers recently tightening their serviceability criteria for new lending.

[Related: NAB clamps down on serviceability]

Loan relief to disguise ‘true’ credit impact of COVID-19: S&P
standard poor ta
TheAdviser logo
standard poor ta

Charbel Kadib

Charbel Kadib

AUTHOR

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

JOIN THE DISCUSSION

You need to be a member to post comments. Register for free today

MORE FROM THE ADVISER

daniel tuttlebee resimac asset fInance ta l27zun

Resimac takes controlling stake in Sonder

Resimac Asset Finance has expanded its acquisition stake in equipment finance business Sonder Equipment Finance...

READ MORE
asic ta 2

ASIC seeks ‘common-sense solutions’ to breach reporting

The Australian Securities & Investments Commission (ASIC) has committed to “improving” the operation of the...

READ MORE
andrew mills homestart ta htfetw

HomeStart drops graduate loan deposit to 2%

HomeStart Finance, a non-bank lender backed by the South Australian state government, has lowered the deposit hurdle...

READ MORE
magazine
Read the latest issue of The Adviser magazine!
The Adviser is the number one magazine for Australia's finance and mortgage brokers. The publications delivers news, analysis, business intelligence, sales and marketing strategies, research and key target reports to an audience of professional mortgage and finance brokers
Read more