May 5, 2020 / 5:05 AM / a month ago

Lockdown bill likely to get much bigger for Australia's top banks

* Westpac, NAB and ANZ expect credit losses to top A$17 bln

* COVID-19 lockdowns to trigger Australia’s 1st recession in 30yrs

* Bank’s credit loss estimate likely optimistic - analysts

* Bill could more than double to A$45 bln - Evans and Partners

By Paulina Duran

SYDNEY, May 5 (Reuters) - Australia’s big banks have warned that credit losses from the country’s first recession in three decades will top A$17 billion ($10.96 billion), but analysts predict the bill for the coronavirus lockdown will be higher - perhaps more than double.

If losses spike, there could be more capital raisings and dividend deferrals at the “Big Four”, which together fund 80% of Australia’s loans, impeding their ability to plough money into the economy as it recovers from the virus that has infected 6,800 people and killed 96 in the country, analysts warn.

Westpac Banking Corp, National Australia Bank , and Australia and New Zealand Banking Group more than quadrupled their bad debt charges to a total of A$5 billion in their first half, leading to a fall of almost two-thirds in their combined profits to A$3.8 billion.

These provisions, higher than during the global financial crisis, are based on what analysts say is an unlikely rapid, or V-shaped, recovery and flawless government policy.

“We expect provisions to iterate much higher and approach A$45 billion in total losses,” Evans and Partners banking analyst Matthew Wilson said.

“We suspect the industry may be too optimistic on mortgage losses given we have had such a long and benign cycle.”

Commonwealth Bank of Australia is yet to reveal its credit loss estimate. In February, the country’s largest lender booked a A$649 million charge but analysts see that doubling to over A$1.3 billion at its quarterly update on May 13.

“The crisis is evolving at such a pace it is difficult to predict how deep the economic impact will be or how long the recovery will take,” ANZ CEO Shayne Elliott has said. “There is no doubt that the months ahead will be extremely difficult.”

BENIGN ASSUMPTIONS?

The banks’ loan loss estimates assume efforts to contain the pandemic will trigger a sharp but quick economic contraction of about 3-5% in 2020.

That would bring a rise in unemployment to about 9% by the end of the year and a drop in house prices of about 10% before stabilising in 2021, according to the banks’ releases.

But the central bank expects the economy to suffer its biggest contraction since the 1930s in the first half of 2020, due to virus-related containment measures, a 10% jobless rate by June and a slow, protracted recovery thereafter.

Australia may have already lost almost a million jobs between mid-March and mid-April, data shows.

If the severe downside scenarios play out instead of the banks’ more benign assumptions, then “further capital raisings or further caps and deferrals of dividends are a possibility,” said EY Oceania Banking and Capital Markets Leader Tim Dring.

‘CAUTIOUS ABOUT BUYING BANKS’

The banks’ provisions currently cover close to half their impaired assets, and have already triggered a discounted capital raising at NAB, the halting of dividends at Westpac and ANZ, and strategic reviews for possible asset sales at Westpac.

ANZ and Westpac’s actual impaired assets rose by about a fifth at the end of their financial year in March, even before an expected hike in delinquencies due to the virus crisis.

“The asset quality of ANZ, NAB and Westpac does not yet reflect the deteriorating environment” Fitch Ratings said, adding impairment loan ratios would increase substantially through the first half of 2021.

Australia’s big four banks, which provide A$2.7 trillion in loans, are all trading at a discount to their book values now, Refinitiv data shows.

“If one feels that we are in for a V-shaped recovery, then the banks would probably be OK,” said Investors Mutual founder and investment director, Anton Tagliaferro.

“But if there is a prolonged downturn with unemployment staying higher for longer and bankruptcies, one would have to be very cautious about buying banks.” ($1 = 1.5516 Australian dollars)

Reporting by Paulina Duran in Sydney; Editing by Himani Sarkar

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