Tens of thousands of property borrowers are ignoring communications from ASX banks according to reporting by the Australian Financial Review.
The AFR is reporting that a fifth of the 400,000+ deferred home loan borrowers are not responding to phone calls, texts, letters and emails from banks. That equates to around 80,000 loans with a combined value of $30 billion.
The publication said that one senior banker explained that people were obviously not talking to the banks in the hope that the problem might simply go away. But, he added, this situation could not continue indefinitely. The AFR quoted that banker:
"The notes will get a little bit sharper to get a response. One month after, three months after, the letters will get more severe. Then, of course, we'll get a bullying complaint."
The article made no specific reference to which bank the banker came from.
There are a number of ASX banks in Australia: Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Macquarie Group Ltd (ASX: MQG), Suncorp Group Ltd (ASX: SUN), Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN) and MyState Limited (ASX: MYS).
These banks have collectively provisioned several billion dollars of COVID-19 credit provisions. So they are expecting some borrowers not to be able to repay.
What's going to happen?
Australia has officially entered a recession, so it's not surprising that the banks are seeing some difficulties with a material portion of their loans.
Borrowers currently have a lot of leeway with the ASX banks as everyone tries to collectively get through this without having a GFC-like meltdown. It's working well so far, particularly thanks to the government's jobkeeper and increased jobseeker schemes.
But government support is scheduled to reduce at the end of September 2020 and then drop further at the end of December 2020.
ASX banks can't be lenient forever. They aren't charities, they are meant to make profit. Banks can't exactly make a profit from loan if it's never paid, can they? Non-paying loans eventually become bad loans and then ASX banks would normally do what they can to get their money back.
The introduction of an effective vaccine could be a double edged sword for some of these troubled borrowers. Many industries like hospitality, tourism, travel and education are suffering because of COVID-19 impacts. A COVID-19 vaccine could help these industries return to somewhat normal, but it would also likely mean the ASX banks (and regulators) will be less forgiving for those struggling borrowers.
But who knows if a world-changing vaccine is possible at this stage?
Are the ASX banks a buy?
Some banks have fallen significantly since the COVID-19 crash around six months ago.
The Westpac share price is down 34%, the CBA share price is down 25.5%, the ANZ share price is down 35% and the NAB share price is down 36.5%.
They are clearly a lot cheaper than they were before. But I'm not sure if they are worth buying because it's uncertain how many of these non-paying loans will turn into bad debts.
Not only are some loans worrying, but the banks' overall net interest margin (NIM) is falling because of lower official interest rates in Australia and overseas. A lower NIM is bad for bank profitability and that's bad for dividends.
If I had to buy one big four ASX bank it would be CBA because of its higher quality and strong balance sheet.
However, out of all of the financial businesses I named earlier in the article, I'd go for Macquarie because of its global earnings diversification and its smaller loan book (which is less likely to derail Macquarie's overall profit).
