I wrote a blog on the 24th March, as the proverbial was literally hitting the fan. It’s interesting to go back and have a quick look over that now and reflect versus where we are now 5 months later. Credit markets did seize up immediately, but then loosened back, but now we’re seeing re-tightening by the local banks as they start getting concerned with longer-term economic outlooks – and the credit quality of their existing balance sheets.
- LVRs pulling backs?
- Increased interest rate margins & fees?
- Appetite reducing in general?
All of the above have already happened since March, in some cases quite markedly. There’s plenty of talk about banks being closed for business, whilst all of the banks profess “we’re open for business” .
It’s pretty fair to say this has all been pretty typical – and the goal posts have been moving almost weekly – BUT… Whilst there absolutely are now some closed doors, this is NOT across the board.
Are Banks’ Doors Closed?
We’ve heard people in our industry say “the doors are closed”.
Incorrect. Kinda…
In the property development & investment space, a couple of the major banks HAVE switched off or severely restricted applications in the last few weeks.
In the general business & corporate lending space, all of the banks are still technically “open for business”, although some are only looking at property-secured deals, whilst others are just being very selective about the deals they’ll consider.
Are they more cautious and conservative than ever? Absolutely.
But we have still been getting deals through over the last few months – even with banks (click here to read about some of our latest deals done, approved since March).
Whether the debt is sought for property or business, there is a heavy focus on the source of income and:
- how it was impacted by COVID (and could be again, in the event of a Melbourne repeat); and
- how it may be able to get through what is likely to be a protracted economic recovery.
Our guess is that it’s not over yet though…
Banks and non-banks alike have tightened up because of that global COVID buzz-word – “uncertainty”. Even 5 months in now, the banks still aren’t sure how bad their books are or will become. How can they not know, well you may ask.
For pretty clear & simple reasons when you think about it:
- Covenants? Nope… The vast majority of businesses have been hammered since COVID hit, so reviewing financials as part of usual covenant reporting is useless.
- Defaults? Nope… They gave repayment deferrals to everyone that asked, so the usual obvious trigger of repayment defaults hasn’t been happening.
- Government support – businesses that might otherwise fail, are being held up by the stimulus, as well as a big relaxation in insolvency laws (see this report [SIVAA] for incredible stats on how few insolvencies have been happening)
The banks have started writing up provisions and making profit announcements that aren’t what they would have been without COVID, so the logic goes that:
- Less profit for the bank, with more expected potential losses to come amidst a recession of unknown length
- Equals lower dividends for shareholders
- Equals banks driven to drive profits back up ASAP
- Equals banks will need to push an improvement in profit margins on to borrowers
- BUT pushing it on to consumers and small businesses is unpopular
- OH BUT, will 4-Corners or A Current Affair run a story about how badly the banks are treating commercial property investors, or businesses with $5+m debt? No chance. So guess who’s likely to bear the brunt?
- Equals increased margins/fees for borrowers that don’t fall in the consumer or small business category.
Business/Corporate/Property borrower with over $3m debt?
- and you’re worried about how you’ll meet repayments again, click here to read our opinion of what you should be doing NOW
- or business is good but you don’t want your bank ramping up your pricing, click here to find out what you can do to keep your pricing in check.
