Many small to medium enterprises have been given a six-month reprieve by banks propping up their businesses by loan deferrals, and the government via wage subsidies. But senior bankers recognise that ultimately, many will never recover.
“There are businesses that are broke now and have no chance of survival but have been given a six-month stay of execution,” Mr Hand said.
“They will hope that the Christmas trading period will deliver a miracle and they’ll survive – but not everyone will.”
ANZ made provisions for $1.67 billion in bad debts – including $1 billion just from COVID-19 – at its interim results on April 30. The bank says about 15 per cent of its business lending book – or 19,000 customers – have asked for support. This includes repayment deferrals, fee waivers or other forms of assistance.
Triage centres for bad debts
With banks across the board putting more resources into call centres to deal with the volume of inquiries, Mr Hand said ANZ had also begun resourcing “workout” and restructuring specialists, to deal with the inevitable spike in business failures he sees from late 2020 and beyond.
“It is better to have a fence at the top of the hill than a hospital at the bottom,” he told The Australian Financial Review. “We have no interest in seeing our customers go into bankruptcy.”
Mr Hand and his executives have been raiding their contact lists for experienced bankers as they set about creating state-based “cells”, or triage centres, to manage growing bad debts.
Grey-haired bankers will be teamed up with younger relationship managers as they have difficult conversations with customers about struggling businesses.
The latest APRA figures show about 750,000 loans worth about $250 billion have been deferred; the split between home loans and business loans is roughly 60:40, but dependent on each bank’s lending profile.
Mr Hand said the six-month deferrals were not a deadline and the bank would be proactively contacting businesses to help them arrive at the right solution. Some may be able to scale down, or pivot to online.
The conversations to come will be much longer and more involved – taking hours or days – than the deferrals decisions put in place after an average 10-minute phone call.
“We can’t wait six months. We need to start these conversations with customers now. The question for us is, ‘How do we get in front of the problem and give them the best chance of walking away with some capital?'”
Every business customer is different, however, and will require different treatment. While some of ANZ’s customers were forced to draw the shutters overnight, others, including a bike shop, have recorded a 300 per cent spike in sales during the crisis period.
Customers may be sceptical about promises of “bespoke conversations” and “tailored solutions” from ANZ’s workout and restructuring team, given less than two years ago, the bank was being raked over the coals by the Hayne royal commission for its lack of empathy and transparency.
Mr Hand says the bank learned a lot from the experience which was focused on the Landmark portfolio of agribusiness loans. Foreclosing on farms and selling them off was good for neither the bank nor the customer. He said ANZ has revised its approach.
The best person to run a farm was a farmer, not a banker – and the best time to sell a farm is when it was raining, according to Mr Hand. “We can’t make the mistake the banks made in the ’90s, we can’t put too much stock on the market because it will weigh on prices.”
While early estimates of the number of ANZ’s residential mortgage customers needing help were well above 100,000, the bank’s latest project is for this figure to ultimately fall below the six-figure mark.
“We have dozens of customers who call every day asking to unwind the deferrals put in place,” Mr Hand said.
Many customers ahead on their mortgages had chosen to dip into offset accounts or found alternative employment. The bank has been unable to contact 5000 customers who submitted a request but have not picked up the phone.
Commonwealth Bank is also encouraging customers who can end six-month repayment holidays early to do so.
ANZ is concerned that borrowers may become complacent following the recent outbreak of optimism as the number of newly diagnosed COVID-19 cases dwindles and restrictions are eased.
“I worry about the builder who is busy enough working on a bunch of contracts, but what happens in three months’ time when the job is complete? Same for the landscape gardener, who has plenty to do now but what does the demand look like later this year?”
“For those borrowers who operate in an industry where there are obvious challenges over the long term, and where they have too much debt to support the situation, it does them no favours to defer the debt while the interest is being capitalised.”
“This is principally a small-business story, rather than a consumer story, but that flows into consumers because lots of them work for small businesses and will lose their income,” Mr Hand said.
“There is real potential for 2021 to be crunch time for a lot of small-business customers. There is a very good chance that 2021 will be very difficult for small business in this country.”