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.