Australian banks, already facing a drag from the coronavirus pandemic, may see renewed pressure on their earnings after the reemergence of the disease led to fresh lockdowns in parts of the nation in August.

At the heart of the uncertainty facing Australia's banking sector is the loan deferrals extended to customers during the pandemic lockdown. Analysts are concerned that the major banks could see an increase in bad debt once the government's support measures, including cash payments to households, are removed.

"There remains a substantial degree of uncertainty with respect to economy, the virus and the consumer. This is far from avoidable for the banking sector, whose business sits at the heart of the economy and cannot escape the crisis unscathed," Eleanor Creagh, Saxo Market's Australian market strategist, told S&P Global Market Intelligence.

The big four banks — Australia and New Zealand Banking Group Ltd., or ANZ; Westpac Banking Corp.; National Australia Bank Ltd., or NAB; and Commonwealth Bank of Australia — reported mixed earnings in the June quarter as they increased provisions for potential bad loans due to the pandemic. The resurgence of the disease hurt consumer confidence, especially in Victoria, which contributes 23% of Australia's GDP.

Government data released Sept. 2 show that Australia officially entered into a recession, generally defined as two consecutive quarters of economic contraction, in the second quarter. GDP contracted 7.0% quarter over quarter in the April-to-June period, after a 0.3% drop in the previous three months. That marked the country's steepest quarterly fall in GDP since records began in 1959 and its first technical recession in decades.

Deferred repayments

ANZ said it had 84,000 accounts, representing A$31 billion of home loan balances, on deferral as of July 31. In addition, 22,000 accounts were getting business loan deferral benefits. Westpac's mortgage deferral packages outstanding as of July 31 stood at 78,000, amounting to A$30.4 billion in balances. NAB said it had 92,000 in accounts deferred as of June 30, which amounts to A$37 billion in deferral balances.

A significant proportion of loans remain on deferral in the states of New South Wales and Victoria, where the housing and rental markets have suffered the most, Creagh said. "Not a great recipe for heightened default risk over the coming months. Provisioning for bad debts remains quite low and it is hard to get a true read on the true state of the loan books given the economy remains on life support and many loans remain in deferral," she said.

Creagh noted that many of the current stimulus measures will expire in September, unless they are extended. "At the point that the stimulus measures are withdrawn, rising consumer credit defaults, bad debts across residential mortgage books and higher impairment charges will dent returns and draws challenges once more as the economic recovery plateaus beyond the initial bounce back."

Sharad Jain, director at S&P Global Ratings, said the four major Australian banks have granted largely similar moratoriums on repayment of home loans and small business loans. Deferrals on home loan repayments range between 10% and 12% of the total outstanding home loans, while the relief to small and medium-sized businesses covers between 14% and 15% of the total outstanding loans for the segment.

"The significant levels of deferrals and rise in the levels of 90-day past due balances clearly reinforce the stress faced by the household and business borrowers due to COVID-19," Jain said in an email. The deferrals for sectors such as retail trade, tourism, hospitality and entertainment are "significantly higher" than their natural share of the total loan book, he said, adding, "this indicates the greater challenges faced by these industries due to COVID-19 outbreak and containment measures."

Surge in savings

A possible silver lining could be in the form of higher savings, with the government reporting that the household saving ratio surged to 19.8% in the June quarter, from 6.0% in the previous three months.

Thanks to the lockdown, many Australian households stashed away the money they would have otherwise spent on eating out or traveling, driving the savings rate to its highest in several decades. Some of that money saved for a rainy day may help them repay their loans when the deferral window closes.

However, Jain said it's difficult to draw meaningful conclusions from the savings rate in relation to the household sector's repayment capacity. The "uncertainty of future income has contributed, at least in part, to the increased savings rate. It is unclear how long the increased savings will be able to support households that significantly or completely lose their income sources," he said.

Jain also said it was perhaps too early to predict the banks' credit losses based on currently available loan deferral data. "We believe that a clearer picture will start to emerge when the support from the government to struggling households and businesses starts to taper and the loan repayment moratoriums end," he said.