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Loan loss charges cost big banks $6.2bn

A 227 per cent surge in credit impairment charges has dealt a $6.2-billion blow to major bank earnings, which are set to face ongoing headwinds in the coming years, according to an EY analysis.

Global research and advisory firm EY has published an analysis of the major banks’ half-year results for the 2020 financial year (1H20), revealing that, collectively, the big banks recorded a 42.6 per cent ($6.2 billion) slide in cash earnings after tax, from $14.5 billion in 1H19 to $8.3 billion.

The lenders have borne the brunt of a significant increase in credit impairment charges due to expectations of a spike in loan defaults from the COVID-19 crisis.

In total, impairment charges surged by 227 per cent to $5.73 billion; however, this excludes provision from the Commonwealth Bank of Australia (CBA), which ended its 1H20 reporting period on 31 December, before the crisis hit.  

According to EY’s Oceania banking and capital markets leader, Tim Dring, a high level of uncertainty remains regarding the severity of the deterioration in credit quality.

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“We are still in an interim period where the banks are not yet aware what the full extent of these losses will be,” he said.

“Many customers have taken advantage of repayment holidays, which makes determining the true scale of potential delinquencies hard to predict.”

The EY analysis also reported that return on equity across the big four banks also decreased, down by an average of 563 bps to 6.3 per cent.

The low interest rate environment also resulted in 2 bps reduction in the big banks’ collective net interest margins to 1.93 per cent.

Mr Dring said he expects the banks to face ongoing headwinds and revenue compression amid “ultra-low interest rates” and “continued uncertainty over the credit growth outlook”.  

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“[With] the cash rate set to remain at historical lows for a prolonged period and the economy in a sharp and possibly protracted decline, there is no doubt that the major banks face substantial earnings headwinds in an environment of unprecedented uncertainty,” he added.

Majors to weather grim economic conditions

Mr Dring acknowledged that the Australian economy would face significant challenges over the coming year, amid expectations of a 4 to 6 per cent contraction in GDP and a sharp rise in the unemployment rate.

However, the EY analyst said the major banks would weather the storm by leveraging their strong capital positions.

“Australia may have avoided the last global recession, but we are unlikely to be so lucky this time,” Mr Dring said.

“Unemployment is set to rise significantly, and we are likely to see a significant downturn in property prices in both the commercial and residential sectors through the remainder of 2020 and into 2021.

“Although the hit to the economy will be substantial, Australia does benefit from having strong balance sheets in the banking sector and the government, with the major banks remaining unquestionably strong.”

He concluded: “Still, the economic outlook – and therefore the pace and timing of economic recovery – remains highly uncertain and much will depend on when, and how, travel restrictions and social distancing are eased.”

[Related: Westpac braces for 63% surge in credit losses]

Loan loss charges cost big banks $6.2bn
Big four banks
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Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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