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

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.

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]