(Alliance News) - Credit ratings agency Moody's Investor Service said Thursday it expects loan losses across the largest banks in Australia, the UK and the US to rise.
Despite sizeable government stimulus and gradual economy recoveries, Moody's expects the economic shock caused by the coronavirus to drive bank loan losses higher in the US, the UK and Australia.
"Loans to coronavirus-exposed retail, hospitality and aviation sectors, as well as unsecured lending, will generate most pandemic-related credit losses," Moody's added.
It continued: "While extensive bank forbearance and government support measures have limited the growth of non-performing loans so far, provisions for expected credit losses rose materially during the first half of 2020, largely driven by more negative macro economic assumptions and new accounting standards that require provisions to be more forward-looking."
Moody's expects non-performing loans to accelerate as government stimulus and bank forbearance expire, which will be followed, naturally, by higher loan write-offs.
"However, the volume of additional charges could be lower given the significant provisions already taken to date. At the same time, for IFRS 9 reporters provisions are likely to remain material as exposures migrate between IFRS 9 stages," Moody's added.
Laurie Mayers, associate managing director at Moody's said: "The growth trajectory of banks' loans losses remains uncertain, given the moderating effect of government support and bank forbearance, coupled with uncertainty over the pace of the economic recovery. Loans to coronavirus-exposed corporate sectors such as retail, hospitality and aviation will generate most pandemic-related loan losses. Unsecured personal loans are also at risk given elevated unemployment levels."
Moody's believes UK lenders will see the largest rise in non-performing loans, due to a sharper economic contraction, and high volume of loans showing signs of deterioration.
That said, Moody's noted, they will not necessarily report the biggest rise in loan losses, as some non-performing loans will relate to restructured loans and not to defaulted exposures that require a write-off.
In Australia, their collateralised residential mortgages focus provides a buffer, Moody's said, which saw them report a more moderate rise in provisions despite higher exposure to at risk sectors. As credit quality deteriorates further, these banks' provisions will remain high, the credit ratings agency added.
In the US, banks' loan losses will largely depend on unemployment trends, as they have greater exposure to unsecured consumer credit due to their sizeable credit card portfolios, Moody's said.
By Paul McGowan; paulmcgowan@alliancenews.com
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