If you’ve had a gutful of the dreaded COVID-19 virus and the media coverage it has brought with it, you’re not Robinson Crusoe.

Let’s put all of that negativity to one side and focus on real data which indicates to me that perhaps the tide is turning in a positive direction, which could be to the benefit of the thousands of part owners of the banks.

I’ll get to the point, home loan deferrals.

Back in March last year when the ‘you know what hit the fan’, the banks offered borrowers of both home and business loans the option to defer or ‘hit pause’ on their repayments for 6 months.

Data announced by the CBA in their full-year results back in August indicated that at the peak of home loan deferrals there were 154K loans on pause. At 30 June 2020, this had dropped to 145K, and at the end of July 2020 they were 135K or 8% of their book.

As reported in ‘The Australian’, data produced by regulator, the Australian Prudential Regulation Authority (APRA) indicated that at the end of November this number had dropped to just over 2%. At the same date, WBC’s deferred loans sat at 3%, NAB’s at just over 1% and ANZ’s had dropped to 3%.

It’s evident all lenders have experienced the positivity of this trend with the total value of the $2.7 trillion in loans across all lenders on deferral dropping from 10% in May – June 2020 to 1% currently.

How is this going to be of benefit to a bank shareholder?

Well, banks account for loan defaults by making a ‘provision’ for bad debts in their accounts. They book an entry that hits profit now and when the loan goes bad it is written off against the liability on the balance sheet. They essentially ‘provide’ for the likelihood of debts going bad without knowing what will actually go bad before it does go bad.

The CBA in their FY20 accounts made an additional $1.5 billion provision for the potential default of loans due to the impact COVID-19 was forecast to have on their loan book. This provision amounted to 15.8% of full-year net profit after tax. At the time of provisioning in June 2020, there was still a great deal of uncertainty around how bad the economic impact would be and by extension the number of loans that would go bad. Fast forward to today and it appears the fallout will be nowhere near as bad as what the CBA thought it might be when they made that $1.5 billion provision.

While the landscape is not as bad as feared, the CBA did not undo the provisioning in the half-year to 31 December but instead chose to be conservative and keep that powder dry due to the lingering doubts over the tourism, leisure and hospitality industries, those specifically hardest hit by COVID.

The CBA did increase their payout ratio to 67% for the interim dividend after the withdrawal of the 50% restriction imposed by APRA, however, there is still room for significant dividend growth in the full-year results which will be announced in August.  The other ‘Big 3’ are about to report their half-year results…we anxiously await their dividend announcements.

With the availability of franking credits attached to those bank dividends, yields can become even more compelling to investors, especially for self-funded retirees in the tax-free pension phase, given the average term deposit rate over the 12 months is ~0.50%.

On the back of improving economic growth as the vaccine rolls out, we could continue to see some air getting pumped into the share prices of the banks over the coming months, but we all know how things can quickly change for the worse.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.