Banks lead the economic recovery

  • By Patrick Coghlan

As the reporting season rounds off for the banks, the sector may be at the forefront of an economic recovery, as CreditorWatch’s Patrick Coghlan gives his take on the outlook for businesses. 

The economy is tracking surprisingly well as we approach the much-anticipated end of the federal government’s JobKeeper wage supplement in March.

We anticipate better-than-expected economic news is likely to play out in a positive way in payments data in the near-term.

The optimism about the economic recovery was reinforced by strong results from many financial services businesses during the recent profit reporting season.  For instance, at ANZ, just one per cent of home loan customers are still receiving COVID support.

In its first quarter update, Westpac announced a $501 million impairment benefit as a result of improving credit quality. Additionally, the number of stressed assets on its book fell and the number of home owners and small businesses deferring repayments also declined. Just one per cent of small business customers are still deferring their loan repayments.

Over at the Commonwealth Bank, its half year results reveal just 25,000 home loan borrowers are still deferring payments, down from 145,000 loans in June.

Only 2,000 small business customers are still deferring payments on their obligations, down from 67,000 small business customers at the full year. Although the value of troublesome and impaired assets did grow to $8195 million, which the bank attributes to clients in the airline, entertainment, hospitality and commercial property sectors.  

National Australia Bank’s first quarter update disclosed credit impairment charges fell 98 per cent in the second half of 2020 to just $15 million. Similarly, the bulk of customers have resumed their repayments, representing 90 per cent of loan balances. 

NAB also recently announced plans to buy neo bank 86 400, prompting discussion about whether this is the end of the neo bank experiment. 

Many of these fintechs have found it extremely tough to go up against bigger banks with deeper pockets and more sophisticated infrastructure. 

We expect banks to continue to lead the economic recovery, buoyed by rising house prices and credit growth

In particular, new players in the payments space have found they simply can’t compete with the network effect banks enjoy as a natural advantage given their diversified businesses and economies of scale. 

Hopefully this won’t prevent emerging financial services businesses from continuing to innovate and challenge incumbents and the status quo.

Nevertheless, we expect banks to continue to lead the economic recovery, buoyed by rising house prices and credit growth. In light of the vastly different operating environment COVID delivered, it’s no surprise financial services businesses including Suncorp and Challenger have announced they are taking a new strategic approach. 

Challenger, which announced no significant credit defaults at its recent results announcement, has acquired a bank, MyLifeMyFinance, from part of Catholic Super. The deal gives the annuities specialist an ADI licence and sees it enter the term deposits market.   

Meanwhile, Suncorp is embarking on a new operating model and has a rejigged executive team. 

Its Vero insurance business is exiting the consumer and construction markets and the broader Suncorp business will stop underwriting travel products. It will also no longer offer personal loans to focus on growing its share of the home loan market.

As for the future, expect the cash rate to remain low in the immediate term, which will continue to support the housing market. 

This is despite the four per cent decline in the fixed-rate AusBond Composite Bond Index since November indicating bond investors clearly see rate hikes in the future.

Nevertheless, there are still potholes and blind corners for the economy ahead. Australia’s currently fractious relationship with our major trading partner China, uncertainty about the COVID-19 vaccine rollout and the eventual opening of both domestic and international borders are still unknowns, in addition to any future outbreaks and potential lockdowns.

While the unemployment rate is now at 6.4 per cent, down from 6.6 per cent in December, this number still has a long way to go before it’s back to pre-COVID levels of 5.1 per cent. 

The end of JobKeeper is also likely to prompt a spate of bankruptcies and insolvencies. How this will play out across the economy is yet to be determined. 

In the same way some financial services businesses are re-thinking their business models, many other companies must also now reflect on whether their strategy is still fit-for-purpose given the new conditions of the post-COVID environment. 

Pursuing opportunities to streamline operations and cut costs must remain a priority. At the same time, it’s vital to consider new lines of business as well as divestment or closures of non-performing or non-core departments, products and services.

Cash flow will always be king. So emphasis must be on ensuring customers meet their payment terms and working with late payers to understand their situation and come to an agreement that’s suitable to both sides for settling overdue accounts. 

It will be fascinating to observe how businesses of all shapes and sizes, across all industry sectors, perform over the next few months. 

I’m hopeful the economy will continue down the relatively benign path it has trodden recently and upcoming economic data confirms the continued economic recovery.

Patrick Coghlan is the CEO of CreditorWatch