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House price falls, recession prompt BoQ to increase bad loan provisions

House price falls, recession prompt BoQ to increase bad loan provisions

House prices could fall by as much as 12.5 per cent this financial year under the most severe case scenario modelled by the Bank of Queensland that has prompted it to increase its provision for bad loans to $175 million as it braces for a longer and deeper recession.

Investors punished the bank on Tuesday causing the share price to slide by more than 7 per cent after revised modelling factored in the impact of mounting unemployment, sliding property prices and negative gross domestic product on BoQ’s loan book.

BoQ has already been the most exposed bank to loan deferrals, according to data released by the Australian Prudential Regulation Authority, with 12 per cent of home owners and 16 per cent of small business customers applying for loan relief.

The provision for loan impairments, up from $28 million in April, was based on new economic assumptions using Reserve Bank of Australia and internal data. The base case scenario predicts GDP will contract by 6 per cent, unemployment will reach 10 per cent, residential property prices will fall by 6 per cent and commercial property by 10 per cent this year.

On the most severe scenario, weighted by the bank as having a 5 per cent probability, GDP will contract by as much as 9 per cent, unemployment will reach 12 per cent, residential property prices will fall by 12.5 per cent and commercial property by 20 per cent this year.

Chief executive George Frazis said the revised provision reflects the impact of the virus but was pleased that a quarter of the bank’s customers who applied for loan relief had started making full or partial repayments.

“As we all know, this has been an unprecedented year and BoQ is committed to supporting our customers throughout this period. We are very pleased to see many of our customers returning to work and reopening their businesses and will continue to work closely with those that require further assistance,” Mr Frazis said.

Evans and Partners banking analyst Matthew Wilson said he was not surprised by the changes to BoQ’s loan impairment provision, saying he had forecast bad debts of $219 million.

Mr Wilson said the bank’s underlying assumptions were “rather bullish” as they relied heavily on the base case assumption, with only 20 per cent probability afforded the downside scenario and 5 per cent to the severe.

BOQ also announced it had conducted an audit of employee remuneration and found $2.4 million in superannuation had not been paid properly. The bank has set aside $11 million for wage issues and said it is still investigating the matter.

The Finance Sector Union national secretary Julia Angrisano said 750 staff would have to wait until March next year to be repaid, adding this was “not acceptable”. “This is wage theft and we are calling on the Bank of Queensland to accelerate the repayment program to pay affected employees immediately,” Ms Angrisano said.

Mr Frazis apologised for the errors and committed to contacting all impacted employees in the coming months. “We will get this right and we will make sure our people, past and present receive every cent they are owed. This is an absolute priority,” he said.

Mr Frazis did not provide an update on whether the bank would pay shareholders a dividend this year, only to say he realised how important the payments are to retail investors.

“We have completed our scenario analysis in relation to dividends and have consulted with APRA in line with the guidance issued on July 29, 2020. The board will make a determination on dividends in relation to FY20 at our full-year results,” Mr Frazis said.

BOQ’s full-year results will be announced on October 14.

Mr Wilson said he did not expect the bank to pay shareholders a dividend. “BOQ has much on its plate, rebuild the IT platform, rebuild the culture and grow.”

Morningstar analyst Nathan Zaia said BOQ’s deferred loan book was on the “upper end of the market” and predicted cuts to JobKeeper would put further pressure on the banks.

“The government is hoping that as they reduce JobKeeper, more of those jobs will come back so they offset each other,” he said. “But I don’t think that’s going to happen. I think we’re going to have a period where there’s more people doing it tough.”

BOQ’s share price closed at $5.89.

This article is republished from https://www.brisbanetimes.com.au/ under a Creative Commons license. Read the original article.
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Finance

RBA Urges Banks to Keep Lending

RBA Urges Banks to Keep Lending-min

The Reserve Bank is urging major banks to use their buffers to keep lending to support business and developers following the largest economic contraction since World War II.

The Financial Stability Review showed banks’ share-to-price book ratios have recovered from March but they are still below pre-pandemic levels “reflecting a decline in the earnings outlook and a reduction in investors’ risk appetite”.

Although banks may want to maintain capital buffers, reducing credit would have a significant impact on the economy according to the RBA.

According to stress test simulations in the report showed banks have sensitivity to falls in GDP, property prices and unemployment.

Despite this uncertainty, housing finance grew 12.6 per cent in August off the back of government stimulus packages.

However, there were still risks associated with commercial real estate with conditions deteriorating in retail and the once tight office sector according to the RBA.

“The Australian banking system entered the pandemic with a much stronger capital position than in previous downturns,” the RBA review said.

“This balance sheet strength has enabled banks to absorb shocks, rather than amplify them as they did in the GFC.

“Banks have continued to lend, including enabling businesses to draw down lines of credit as a precaution early in the crisis.

“They do, however, face the prospect of sharp rises in borrower defaults.”

The review recognised some banks may be unwilling to eat into buffers due to facing automatic restrictions on earning distributions and acquiring lower capital ratios which could limit access or increase cost of funding.

Banks also want to avoiding regulatory repercussions as a way of reducing their own risks and protecting themselves.

“If banks were to cease lending in an attempt to conserve their capital buffers, the reduction in credit availability would have a significant contractionary impact on the economy,” the RBA said.

“By amplifying the downturn, this contraction in credit supply would ultimately be detrimental to the banking system.”

This article is republished from theurbandeveloper.com under a Creative Commons license. Read the original article.

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RENEE MCKEOWN

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Finance

Stimulus Pushes Lending to Record Highs

Stimulus Pushes Lending to Record Highs

Government stimulus has shown up in the latest lending figures as Australians take advantage of record low interest rates and government support to invest in new housing.

Housing finance grew 12.6 per cent in August, outstripping the previous 10.7 per cent gain in July, with first home buyers and owner-occupiers leading the charge.

First home buyers grew 18.3 per cent, while owner-occupiers clocked a 13.6 per cent increase—the largest month-on-month rise in the history of the series.

Housing finance figures are expected to increase again when the removal of responsible lending curbs take effect and place upward pressure on house prices despite stagnant net migration acting as a counter weight.

ABS’ August figures reflect customer demand in June and early July—prior to Victoria imposing its stage 3 and stage 4 restrictions.

Westpac economist Matthew Hassan said the impact on lending from Melbourne’s lockdown will be seen in next month’s figures.

“However, some other drivers of the strength in August will continue,” Hassan said.

“Reopening rebounds are likely to gather momentum in other states—‘catch-up’ activity augmented by low interest rates and ongoing fiscal supports.”

Meanwhile, the Reserve Bank said that rising levels of financial stress will increase the risk of home loan defaults.

In its bi-annual financial stability review, the bank said that if the unemployment rate hits 10 per cent it will double the rate of housing arrears.

“While credit is available at very low interest rates, reduced housing demand from very low immigration and the rise in unemployment contribute to the risk of further falls in housing prices,” the central bank said.

“This increases the potential for losses for lenders in the event of a rise in distressed sales.”

Mortgage arrears are expected to increase once the payment deferrals period ends.

Almost 900,000 mortgages, about one in 10, were deferred in March. By August, 9 per cent of loans worth $160 billion remained on deferral.

S&P analyst Erin Kitson said mortgage arrear rises are likely to be more pronounced in Victoria and areas where tourism is a major employer.

This article is republished from theurbandeveloper.com under a Creative Commons license. Read the original article.

________________________________________________________________________________

ANA NARVAEZ

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Finance

Stimulus Pushes Lending to Record Highs

Stimulus Pushes Lending to Record Highs

Government stimulus has shown up in the latest lending figures as Australians take advantage of record low interest rates and government support to invest in new housing.

Housing finance grew 12.6 per cent in August, outstripping the previous 10.7 per cent gain in July, with first home buyers and owner-occupiers leading the charge.

First home buyers grew 18.3 per cent, while owner-occupiers clocked a 13.6 per cent increase—the largest month-on-month rise in the history of the series.

Housing finance figures are expected to increase again when the removal of responsible lending curbs take effect and place upward pressure on house prices despite stagnant net migration acting as a counter weight.

ABS’ August figures reflect customer demand in June and early July—prior to Victoria imposing its stage 3 and stage 4 restrictions.

Westpac economist Matthew Hassan said the impact on lending from Melbourne’s lockdown will be seen in next month’s figures.

“However, some other drivers of the strength in August will continue,” Hassan said.

“Reopening rebounds are likely to gather momentum in other states—‘catch-up’ activity augmented by low interest rates and ongoing fiscal supports.”

Meanwhile, the Reserve Bank said that rising levels of financial stress will increase the risk of home loan defaults.

In its bi-annual financial stability review, the bank said that if the unemployment rate hits 10 per cent it will double the rate of housing arrears.

“While credit is available at very low interest rates, reduced housing demand from very low immigration and the rise in unemployment contribute to the risk of further falls in housing prices,” the central bank said.

“This increases the potential for losses for lenders in the event of a rise in distressed sales.”

Mortgage arrears are expected to increase once the payment deferrals period ends.

Almost 900,000 mortgages, about one in 10, were deferred in March. By August, 9 per cent of loans worth $160 billion remained on deferral.

S&P analyst Erin Kitson said mortgage arrear rises are likely to be more pronounced in Victoria and areas where tourism is a major employer.

This article is republished from theurbandeveloper.com under a Creative Commons license. Read the original article.

________________________________________________________________________________

Ana Narvaez

________________________________________________________________________________

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