September 2020 & beyond – the challenging road ahead
Banks can only do so much for their customers and the good of the economy, even when operating with the best of intentions. Come September, they’re worried their best intentions may be to no avail.
September - that’s when JobKeeper, JobSeeker and other government programs designed to sustain the economy during the COVID-19 crisis are scheduled to end; when the artificial economy these programs have created will be lurching into the unknown.
Struggling business owners should not expect much help from banks, themselves struggling to deal with royal commission impositions as well as pandemic chaos.
According to the CEO of the Council of Small Business Organisations Australia, several hundred thousand of the nation’s small businesses will disappear as a result of the virus. He says that in the aftermath of the GFC some 200,000 existing businesses were lost, and in 2009-10 alone, 100,000 new ventures collapsed, “an indication of what is ahead of us now”.
Serious current considerations
Liquidations, Receiverships and Voluntary Administrations are far fewer than would normally be the case in such a devastated economy.
The rate of business collapses has been held back, not only by government financial support, but because banks have deferred a vast number of SMEs’ loan repayments, even increasing loans in some instances to enable them to fund JobKeeper wage payments.
Macks Advisory is – as indeed are other insolvency practitioners – only too well aware that many businesses are continuing to operate although they’re insolvent.
Some were solvent before the COVID-19 crisis but have since succumbed, continuing to operate while insolvent only because the government passed legislation giving directors six-months of temporary relief from personal debt liabilities usually incurred for illegal insolvent trading. But these companies will go to the wall when this temporary relief expires in September.
Ironically, other so-called Zombie companies, whose illegal activities before the crisis were costing the economy more than $3b annually, have also had their survival temporally extended by this legislation. For definition of a zombie company and an explanation of zombie activity, go to www.macksadvisory.com.au and type “zombie companies” in the search window.
However, as worthy and unworthy companies collapse in a heap in the immediate future - many of those that are currently solvent because customers can’t pay their bills - there will be a likely unprecedented rise in recorded insolvencies, probably worse than post GFC.
Herein lies a dilemma for banks
Modelling by Deloitte Access Economics shows there will be about $60b in lost income in the Australian economy between the start of April and the end of July.
Research by Bastion Insight reveals 49% of sole traders and 40% of small businesses are now working and earning less, and just under a third of business owners have told Bastion they’re drawing on personal savings to stay afloat.
This begs the question of just how many of these owners will have, or be able to generate, enough cash to restart let alone restore their businesses when government assistance is suspended in spring as scheduled, despite widespread demands for its extension.
The banks’ dilemma is two-horned. They have not only lent money to businesses, many of which may be insolvent or soon will be, but also hold mortgages on the houses of many of the owners of these businesses who are struggling make loan repayments, but are soon unlikely to be able to make any.
The bumpy road ahead
The big four banks reported delaying home payments totalling $150b for almost 430,000 customers at the start of April and tens of thousands more customers have been are asking for help each week since then.
About a third of home loan deferral requests are being made to the Commonwealth Bank of Australia (CBA) representing about 12% of its home loan accounts, but it, and indeed all banks, are in for the mother of all shocks when it becomes apparent to them in the months ahead the true financial state of businesses and individuals.
Align this impending revelation with CBA’s recent prediction (as Australia’s largest provider of home loans) that house prices will fall 10% in the next year and perhaps by as much as 30% in 2022, then the seriousness of the dilemma facing all providers of home finance is heightened considerably.
Given that more than half of Australia’s workforce is now being sustained by JobKeeper or JobSeeker, providers of home loans must soon face the unpalatable need to decide whose repayments should be further deferred and whose shouldn’t - or in other words who may have to sell their home and most probably for considerably less than they paid for it.
Banks, already doing their best to erase the stigma of a royal commission by treating customers empathetically, must soon face a further loss of public relations capital by having to force many customers from their homes.
Prime Minister Scott Morrison and Treasurer Josh Frydenberg have shown they’re optimistic that the nation’s businesses will be rapidly restored to good health post COVID-19, a sentiment currently shared to an encouraging extent by the Australian share market.
That’s certainly something to be wished for devoutly by bankers and their customers.
