UBS on how the banks can aid the virus-hit economy

Via the excellent Jonathn Mott at UBS:

Banks well positioned to assist the Government and RBA
In recent days the Government and RBA have announced a comprehensive package of initiatives to support the economy through the COVID-19 pandemic. RBA Governor Lowe also stated today that authorities will do “whatever is necessary” to support the economy through this period. Over the last decade, the Australian banks have built significant capital, funding and liquidity buffers, reaching “unquestionably strong” benchmarks. This will enable the banks to help customers, support the economy and employment. In this note we look at additional measures that may be considered.

Moving all mortgagors to Interest Only on an opt-out basis
In a very low rate environment, around half of mortgage repayments are to pay-down principal. We believe the banks could consider moving all customers to Interest Only repayments for a period of time (perhaps 12 months) on an opt-out basis. Loan terms could then be extended by an additional year. If all Australian mortgage repayments were automatically adjusted to an IO basis, we estimate this would free up ~$80bn p.a. to Australian households (~4% of GDP, 3-4x the fiscal stimulus already announced).

More support for SMEs – Non recourse loan top-ups at 0.25% and 0% RWA
The key to sustaining the economy and employment during this pandemic is the SMEs. While we were encouraged by the Government and RBA’s initiatives so far, our concern is that many SMEs may be reluctant to increase borrowings in uncertain times, especially when it is secured against their house. One step further may be: (1) Allowing SMEs who were not in arrears as at 31 Dec to extend their bank facility by ~3-4x at 0.25% interest; (2) The top-up is non-recourse; (3) Funded by the RBA’s Term Funding Facility; (4) Zero RWA; (5) Top-ups securitised and sold to the AOFM (Government); (6) Repaid over a 5-10 year time frame when economy recovers; (7) Residual written off.

Reducing RWA buffers. Waiving covenants for corporates
We view APRA’s move to allow banks to utilise their additional buffers to support the economy positively. However, we believe the market may be concerned should banks’ stated CET1 begin to fall, potentially resulting in sharp reductions in share prices. Perhaps APRA could also consider temporarily reducing the buffers in the RWA correlation factors which would release capital without impacting banks’ stated CET1. We also believe if Major banks announced they would be prepared to waive covenants for corporates and extend facilities wherever possible, it would help increase confidence in the markets and improve job security for many employees.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. ApproachingZero

    Interest only mortgage payments and SME loans are futile. It’s just turd polishing:

    If people can’t leave their homes they won’t consume.
    No consumption means unemployment, and unemployment means no consumption.
    Unemployment means no mortgage payments and no rent payments.
    No rent payments means no investor mortgage payments.
    Unemployment means no loan serviceability.
    No loan serviceability means no new loans.
    No new loans means falling house prices.

    Unless the virus goes away, stick a fork in the banks. The RBA has no power to control the virus.

  2. Goldstandard1MEMBER

    How good is interest only????

    hahaha – so you pay the bank the interest (read: profits), whilst your equity is crashing?? Sheesh- sell fast!

    Or do they think this will keep people in their houses and keep property prices where they are?

    • Jumping jack flash

      At the end of the day it is only the interest that matters.

      The principal represents money in the economy that could theoretically be extracted back out at any time and repaid. (The interest cannot be extracted that easily because it is *additional* money on top of the principal that doesn’t exist yet.)

      If the poor saps who own the debt get a reprieve on the principal repayments that can be used then to obtain more [QE-cheapened] debt to push up asset prices, or less ideally simply used to repay interest, then that’s great for the banks.

  3. Jumping jack flash

    “In a very low rate environment, around half of mortgage repayments are to pay-down principal.”

    “If all Australian mortgage repayments were automatically adjusted to an IO basis, we estimate this would free up ~$80bn p.a. to Australian households (~4% of GDP, 3-4x the fiscal stimulus already announced).”

    Hmm… 80bn. 1/2 of the repayment, the rest being the interest component, of course.
    That figure sounds very close to my rough estimate on nonproductive mortgage debt interest extracted from the productive economy each year, representing about 4% of GDP, that if not carefully managed by the banks and RBA, threatens to shrink the economy by this amount.

    How very nice that they recognise this, and suggest that the banks give it back for a while.

  4. I wonder how these changes will impact RMBS? In theory APRA doesn’t like ADIs providing ‘support’ for these vehicles, but I wonder if that’s going to change.
    I suspect a lot of investors will be re-reading documentation very carefully.

  5. The SME package is SOOOO stupid. Most SME owners don’t have residential real estate to collateralise a loan.
    The F#$cktarded Gubbermint needs to make the banks lend (with government CDS) to small businesses only against their future post Wuful cashflows.
    If SME lending is limited to banks applying their usual resi RE security model the country may as well pack up now. We’re cactus.
    My SME has been trading profitably for nearly 10-years. We’ve always had really good cash buffers of around 6-months costs. In 10-years we have never been able to get a bank issued company credit card. Even for as little as 1% or our annual revenue. WTF?
    The Aussie banks are just so shit it is not funny.
    I hope they and their employees get completely reamed by the emerging financial crisis (spoken as an ex-banker, they are all c#nt$)