ASX investors beware, the RBA has warned about what may happen when the loan deferrals come to an end in a few months.
According to reporting by the Australian Financial Review, RBA boss Philip Lowe had a bank-focused meeting on Friday with Prime Minister Scott Morrison and Treasurer Josh Frydenberg as well as bank bosses.
The topic of the meeting was the $236 billion of loan deferrals that are on course to end on 30 September 2020.
One of the problems is that the loan deferrals are going to come to an end at the same time as jobkeeper ends. Most of the COVID-19 support could end at exactly the same time.
There are specific government measures that will support some areas of the economy for longer. There was a package for the arts and entertainment sector. There's also the 'homebuilder' grant which will give people $25,000 who are involved with new home builds or large renovations.
We've already heard that there is extended government support for the childcare sector. A business like G8 Education Ltd (ASX: GEM) will benefit from that. The government may also launch more support for airlines after Qantas Airways Limited (ASX: QAN) did a large capital raising and announced 6,000 job cuts.
Certain industries aren't going to rebound as quickly due to no fault of their own.
RBA wants banks to keep playing their part
AFR sources revealed that whilst Dr Lowe said the economy was recovering well and liquidity was strong, a second-round effect could see demand dry up. There could be another wave of job losses in the next few months.
The RBA boss wants to make sure that banks continue to lend. APRA is thinking about whether to give banks the leniency to defer loans beyond September. That mean the banks wouldn't be punished with capital penalties.
The AFR indicated banks are willing to extend the loan deferrals beyond September, but only on a case-by-case basis after analysing the borrower's circumstances.
What does this mean for ASX shares?
Obviously shareholder returns is not the key focus of the RBA or the government. They want banks to remain robust and continue to lend. The economy needs lending to continue to function properly.
These issues obviously affect the big ASX banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
It would also affect the other lenders like Macquarie Group Ltd (ASX: MQG), Suncorp Group Ltd (ASX: SUN), Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
Banks can't continue the payment holiday forever. They need to make profit for shareholders and they need cashflow from the borrowers. I'm not sure how much more leniency the banks can give borrowers. As much as the RBA wants them to be lenient.
Some banks like Westpac and ANZ have already taken the big decision of deferring the dividend. Considering many industries are now largely operational again, I think banks would be entitled to decide that payments should resume for borrowers who have the capability to pay.
However, I'm sure the federal government feels strongly about not letting house prices crash. A property decline seems unavoidable, but a housing crash wouldn't be good for the economy at all.
Foolish takeaway
I think the RBA is right to be worried about continued bank lending and the deferred loans. No-one wants to see a big wave of forced property sales over the next 12 months.
There are some big problems for the banks to deal with. Their shareholders want them to keep making profit but the government and economy needs the banks to continue to shoulder a lot of the pain. I'm glad I'm not on a bank management team during this difficult period. I don't think the banks are out of the woods yet, though Macquarie and CBA would be my preferred picks if I had to choose one or two banks.
