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Westpac most vulnerable to rise in defaults: Morgan Stanley

Of the big four banks, Westpac has the smallest capital buffer in place to absorb a rise in COVID-induced capital losses, Morgan Stanley has observed.

According to Richard Wiles, analyst at investment bank Morgan Stanley, the big four banks are likely to increase their credit provisions over the coming months to reflect a sharper than expected deterioration in credit quality in response to the COVID-19 crisis.   

Mr Wiles observed that at present, the major banks have collectively set aside approximately $4.3 billion in COVID-specific provisions, representing around 120 per cent of expected losses.

However, Mr Wiles noted that current provisions are based on credit quality forecasts in March and do not reflect the shift in expectations in recent months.

“Given we expect credit quality to deteriorate, we’d anticipate the probability of default will increase, which means that expected losses will go higher, which in turn is likely to push up provisions,” Mr Wiles told investors.

Credit provisions set aside by the Commonwealth Bank of Australia (CBA) and Westpac currently represent 140 bps of risk-weighted assets (RWA) and 120 bps for ANZ and NAB.

However, Mr Wiles claimed that Westpac is most vulnerable to a deterioration in credit quality.

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“Westpac does have the highest expected loss of the four,” he said.

“That expected loss equates to about 150 bps of credit RWA, whereas the others are all a touch below at 120 bps. 

“If you consider provisions relative to expected losses, the measure ranges from coverage of about 144 per cent at CBA to a low of 104 per cent at Westpac, suggesting that CBA has the largest provision buffer on a risk-adjusted basis and Westpac has the smallest.”

Westpac’s impairment charges for the first half of the 2020 financial year (1H20) totalled $2.2 billion, over 70 per cent ($1.6 billion) of which related to additional charges associated with the COVID-19 crisis. 

Deferral defaults to total $4.3 billion

According to the latest available data from the Australian Banking Association (ABA), approximately 430,000 home loan customers have deferred their home loan repayments in response to the COVID-19 crisis – equating to over $150 billion in mortgages.  

Mr Wiles is expecting approximately 20 per cent of such borrowers to default on their debt, triggering a $4.3 billion rise in credit losses across the major banks.

This equates to approximately 30 bps of credit RWA, which Mr Wiles said would require higher provisions. 

However, the analyst noted that this would depend on the length of deferral periods and the JobKeeper program.

Both the deferral periods and the JobKeeper payments are currently set to expire in September.

[Related: Bank profits fall 14% despite $16bn rise in approvals]

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