Modelling how COVID-19 will reshape lending

by Madison Utley27 Mar 2020

While it’s too early to grasp the full impact the COVID-19 pandemic will have on the domestic economy, a data and analytics company has forecasted that short-term bank profits will plummet, loan growth will stagnate and impaired loans will rise, all of which will push the financial services industry to further consolidation.

GlobalData examined the effects of the global financial crisis (GFC) to inform its modelling of the impact the coronavirus pandemic will have on banks and the financial health of the country.

“Loan growth will suffer, despite efforts to keep lending to businesses and households at extremely attractive rates,” said Andrew Haslip, head of financial services content for Asia-Pacific.

“The Reserve Bank of Australia and government funding to lenders will help, but it is highly uncertain whether there will be sufficient appetite for credit to see anything more than marginal increases in 2020.

“New residential mortgage lending will collapse during the weeks, possibly months, of lockdown and enforced social distancing as even viewing a property safely becomes a challenge.

“Spending, barring panic-buying, will decline and businesses will be hesitant to take on even attractive loans when they have no income.”

GlobalData has predicted banks’ quarterly profits will plummet; while this is likely to happen “most dramatically” among the largest banks, it will have longer-lasting implications on smaller lenders, likely contributing to the consolidation of the market.

As such, the recent increase in licenced ADIs, driven by the launch of neo-banks “appears set to reverse.”

In the next five years, GlobalData expects up to a quarter of ADIs to exit the market via sales or mergers.

“Given the expected scale and length of the disruption to the Australian economy, it's no surprise that key banking indicators will suffer, [but] government stimulus measures for the banking sector and broader economy will limit the fallout,” said Haslip.

“[However,] what will be enduring is the effects that mass unemployment, possibly long-term, will have on lending and the increased use of automatic digital decisioning on loans.

“Large swaths of Australians are about to become non-standard risks and lenders are going to have to be able to roll with that for years to come – those that can adapt will be among the fewer lenders that we see in 2025.

“It is a tale that mature banking markets around the world will be telling as they endure their own version of the COVID-19 recession,” he concluded.