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As of July 31, borrowers with bank loans worth $ 73.7 billion were receiving payment relief related to COVID-19.
Loan repayment deferrals were introduced for six months in March at the start of the COVID-19 crisis. The Reserve Bank agreed last month that banks can extend these deferrals for up to another six months, until March 2021.
Banks are not required to treat these loans as unprofitable. Therefore, the latest figures from the Reserve Bank’s Banking Financial Strength Panel show a total of non-performing loans in the entire sector of $ 3.488 billion as of June 30. That is equivalent to 0.76% of total bank loans of $ 457,772 million.
Reserve Bank guidance issued in March said banks should treat loans where borrowers take advantage of COVID-19 deferrals as in execution and not in arrears for capital purposes. If a loan is recorded as delinquent, this usually significantly increases the amount of principal that the bank lender needs to hold against that loan compared to when it is treated as an outstanding loan. However, according to accounting standards, banks must consider future expectations in your loan provision when reporting financial results. This includes a future loss model with the bank’s view of the outlook for economic conditions driven by unemployment, Gross Domestic Product, and house price movements. As of June 30, New Zealand banks’ total loan provisions amounted to $ 3.143 billion.
Now, we do not know what percentage or value of the deferred loans should be treated as delinquent when the scheme finally ends, either in March or in the future. But here are a couple of calculations that speculate on where bad loans from banks might end up. Remembering that delinquent loans are the combination of loans classified as impaired and loans past due at least 90 days.
If, say, 10% of that $ 73.7 billion needed to be treated as delinquent, that’s $ 7.37 billion in loans. Add that to the just under $ 3.5 billion of delinquent bank loans as of June 30 and you’d be $ 10.86 billion of delinquent loans. That would be equivalent to 2.4% of total bank loans as of June 30. For some context in March 2011, after the global financial crisis and just after the great Christchurch earthquake, delinquent loans represented 2.1% of total loans.
In the worst case, if 25% of the deferred loans end up as delinquent loans, that would be $ 18.425 billion. Including those with June 30 delinquent loans gives you $ 21.9 billion worth of value. That’s 4.8% of total bank loans, as of June 30.
In something of a statement of the obvious, a document from the Bank for International Settlements (BIS), the bank of central banks, noted in june that while it is an “indispensable lifeline” for borrowers affected by COVID-19, loan deferrals increase future risks for both borrowers and banks because late payments are not forgiven and must be repaid.
The BIS document said the financial stability implications of deferral programs will depend on the extent to which borrowers are able and willing to repay their debt obligations once the payment holidays expire, especially in the absence of a government guarantee.
“The famous American investor, Warren Buffett, once said: ‘Only when the tide goes out do you know who has been swimming naked.’ The cumulative impact of COVID-19 and deferral programs on bank balance sheets depends on many factors and will only become apparent over time. Therefore, timely rating and measurement of credit risk is critical for banks to provide confidence to supervisors and their stakeholders that “Delaying loss recognition until the tide is out may leave banks and supervisors with fewer options for deal with the repercussions, “BIS said.
The deferred loan figures come from the New Zealand Bankers Association (NZBA). For consumer loans, these show 88,558 customers making reduced loan repayments on loans valued at $ 27.5 billion. Another 61,063 clients had deferred payments on all loans worth $ 20.9 billion. These consumer credit figures, as of July 31, cover mortgage loans, personal loans, credit cards, and overdrafts.
Figures from the NZBA for business loans show 14,511 clients making reduced loan payments of $ 16.3 billion in loans. Another 3,383 clients have deferred all loan repayments for $ 1.2 billion of loans. Another 3,533 clients have restructured $ 7.8 billion in loans due to COVID-19. Business loan figures include term or temporary business / corporate loans, equity or equipment financing, and overdrafts.
The vast majority of deferred loans will be secured loans. Mortgage loans, for example, are guaranteed by the bank against the property for which the loan is made to the owner.
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