The Australian Prudential Regulation Authority (APRA) this week released its Banking COVID-19 frequently asked questions (FAQs).
Here are a few of the key takeaways from the release and what it could mean for ASX bank shares like Westpac Banking Corp (ASX: WBC).
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What APRA's update means for ASX bank shares
Loan Repayment Deferrals
Importantly, the update tackled the issue of loan repayment deferrals. Authorised deposit-taking institutions (ADIs) offering payment deferrals to businesses and other borrowers do not need to treat this as a period of arrears.
That's good news for ASX bank shares ahead of the earnings season. It'll be interesting to see how Commonwealth Bank of Australia (ASX: CBA) reports its loan book with the rest of the big four to follow in October / November.
Residential Mortgage Lending
APRA also gave some guidance on residential mortgage lending. The Aussie regulator acknowledged the challenges associated with loan serviceability assessments for borrowers amid the coronavirus pandemic.
That could mean results for the ASX bank shares don't fully reflect underlying deterioration in debt serviceability.
Market Risk & Credit Risk
The Aussie regulator provided some commentary on both market risk and credit risk. Thanks to the volatility in the March bear market, APRA expects to see an increased level of market risk capital held by the Aussie banks.
In terms of credit risk, one of the FAQs discussed revaluation of residential properties. That's a hot topic right now and one that would concern both ASX bank share investors and homeowners.
Thankfully for both, ADIs will not be expected to revalue residential mortgage properties. That could mean the loan book is looking a touch healthier in these earnings results.
Foolish takeaway
There's a lot to unpack from APRA's Banking COVID-19 FAQs. No one really wants to read regulatory documents just for fun.
However, there are some important implications for ASX bank shares ahead of upcoming earnings releases.
While the longer-term implications of the pandemic aren't yet clear, this clarification is a good thing. It means both investors and the banks are clearer on what's ahead for annual and half-year reporting.
