As announced by the Treasurer in the Mid-Year Fiscal Update on July 23, Australia’s budget deficit hit almost $86 billion in the last financial year and this is set to continue, with forecasts estimating it to be at around $184 billion by the end of the year.
The Financial Services sector has been supporting the Government and related regulatory bodies in their economic response to COVID-19, with a continued focus on creating conditions that support the flow of credit and competitiveness in the sector during these uncertain times, particularly for SMEs.
At a macro-level, this includes a number of initiatives such as:
- Temporary exemptions for lenders that provide leniency on their responsible lending obligations
- RBA encouraging banks to use their capital buffers and providing funding to banks at a fixed rate of 0.25%, so they can reduce the rates for borrowers
- The Australian Office of Financial Management (AOFM) making investments in structured finance markets to ensure non-bank lenders and smaller ADIs have access to affordable funding; and
- APRA – temporary changes to its expectations regarding bank capital ratios.
While these changes are welcome by the Financial Services sector, given the ‘eye watering’ budget estimates, an overall lack of activity in the wider market and decreasing investor confidence, there’s no doubt that we are expecting to see another credit crunch, which was last seen during the GFC.
While the initiatives outlined are aimed at curbing a credit crunch and keep the business momentum going as we get through COVID-19, some of these are set to end by June 2021.
Australia is trending to its first recession in almost three decades due to the economic slowdown. With consumer debt levels increasing and interest rates low, along with financial institution and lender buffers and their access to capital decreasing – the likely result is a tightening of lending for the consumer.
We would expect financial institutions and lenders to see an increase in their expected credit loss over the next 12 months, due to these economic headwinds they are facing.
We are already observing a growing trend in deferrals in the repayments of loans and an increase in hardship loans being taken out by smaller businesses to keep themselves running. This includes the smaller players in the sector, such as Fintechs – who, until the virus hit, were experiencing rapid growth.
It’s evident that this uncertainty is set to continue. While the sector has remained resilient overall, they are still cautious of the risks to their business models. They are having to remain agile as they adapt to this unchartered environment and addressing the financial reporting risks arising from these economic response mechanisms, as well as being cognisant of their past mistakes.
Despite the implementation of the Royal Commission’s recommendations being put on hold because of COVID-19, the banking sector is taking a risk-first approach to managing this new environment.
Working closely in the sector, we are seeing a continued focus from clients in the Financial Services space, to uplift their risk and compliance capability and to remediate customers for past errors. ASIC and APRA are continuing to drive the larger Financial Services players, who are being held accountable to maintain high standards of conduct, and in many cases independent expert assurance engagements are being required to confirm that remediation and uplift programs are being executed.
At a micro-level, the Financial Services institutions have really stepped up to put their customers first during these times - allowing them to repair the reputational damage as an outcome of the Royal Commission. As the Financial Services sector continues to help shoulder the economic fall for Australia as a result of COVID-19, there’s real opportunity for them to not only position themselves favourably in the minds of consumers, but also provide strong foundations for Individuals and businesses to come out of this crisis stronger on the other side.