Banks prepare for more bad debt
AIB chief executive Colin Hunt was confident and assured in his presentation to the bank’s virtual annual general meeting during the week. The balance sheet is strong. The bank is in a good position going into this crisis. It will extend the mortgage break for struggling customers by another three months if people need it.
But there were also clear indications of how this crisis will ultimately leave its mark on banking and the role of the banks in helping small businesses in particular to get through it.
Hunt flagged how the payment breaks would require banks to set aside provisions to cover the changed circumstances. The bank is expected to unveil a provision for an expected rise in bad loans in its first-quarter trading statement, due to be published next month.
If the crisis drags on, the scale of bad loan provisions may well have to rise. This isn’t just about mortgages but business loans going into default. As retailers, cafes and others fail to pay their rent, commercial landlords are likely to default on their loans in some cases.
European banks — including Santander, UniCredit and HSBC — have announced billions of euro in bad debt charges in the last week or so.
Irish banks will inevitably have to move in the same direction. European credit ratings firm Scope said in a report on Thursday that it expects some payment breaks to evolve into loans moving into default.
“We expect a rapid deterioration in mortgage defaults as household income significantly shrinks, especially among re-performing loans,” Scope said.
Ultimately, the direction of the crisis will affect assessment of loan applications and risk appetite for the banks, too.
Hunt alluded to this when he said the bank has a “responsibility to be prudent” in its lending to protect the customer and the bank.
“We have not confirmed any changes to our credit criteria at this point, but it is fair to say that our lending criteria remains under review… given the very uncertain environment in which we are operating.”
Honest, hardly surprising, and perfectly logical, but it isn’t music to the ears of anyone who might be in dire need of a loan from their bank. So if you are looking for your bank to dig you out, don’t bank on it.
Now put it in the context of the Government’s announcement earlier in the crisis about freeing up liquidity through loans. Businesses in real trouble do not want to borrow more money even at below typical commercial rates.
Government schemes have not had the level of take-up they might have. The €200m Covid-19 working capital fund for small businesses has seen a muted level of drawdowns so far. SBCI administers the scheme and since March 10, when it was announced, just €17m in loans have been granted to 100 borrowers. So no wonder there is a major push towards a different grant-based, or loan guarantee scheme which the Government is now working on.
The bankers would prefer to see some kind of State guarantee scheme. This means they could lend the money to SMEs without having to take the risk. The State would take up that slack. The Banking and Payments Federation Ireland (BPFI) called on the Government to set up a scheme offering up to 90pc guarantees against lending to SMEs to aid a recovery of the economy from the Covid-19 pandemic.
Talk about a win/win for the banks, which would get to lend the money, collect the interest and yet not have to worry about whether it was paid back or not. The State would take 90pc of the risk.
Hunt summed it up when he talked about lending and risk in a tougher environment, telling one newspaper: “There’s no point in making unsustainable loans to people.”
Pity bankers didn’t take that view before and during the property boom.
IF you are one of those people who booked flights on Ryanair or Aer Lingus some months back and the flight has been cancelled, you may have actually given the company an interest-free loan.
As the airlines seek to have a temporary change in European law, which currently entitles you to a cash refund, they are seeking to buy time before having to deplete their cash even further by offering vouchers.
The amounts of money held by airlines in pre-paid flights is vast. It runs into billions of euro for some airlines. Ryanair has not said how much cash it would have to hand back to passengers but it is likely to be very substantial.
Industry sources say the amount held by an airline might be around two months of revenues. In Ryanair’s case that would come to well over €1bn, given revenues were over €7bn.
Even if it was 10pc of revenues, it would be around €700m for Ryanair. It had around €4bn of cash available on its balance sheet going into this crisis.
Around €700m to €1bn is a huge amount of cash to give back at a time when you don’t have any planes in the air and recovery is likely to be slow.
For some European airlines giving back the cash, as opposed to a voucher, would be the difference between having to restructure, receive a bailout or even go under.
Both Ryanair and Aer Lingus owner IAG are in better shape than this because they have been better run. Plus, they are having to look as governments across Europe bailout their competitors with billions of taxpayers’ money.
The Government lent its signature to a letter to the European Commission seeking to temporarily amend the law so that cash refunds would not have to be given.
It was a strange decision for the Government to take a position that would be so unpopular with so many travelling punters — or not travelling in this case.
When asked about it in the Dáil, Taoiseach Leo Varadkar defended backing the airlines, saying he wanted to see Ryanair and Aer Lingus operating later in the summer and doesn’t want to be in a position where the State has to bailout airlines. The seriousness of the situation was highlighted on Friday with news of job losses at both airlines.
Ireland is one of 12 countries that have put their names to the letter. The lobbying across Europe on this issue must be ferocious.
But we have been assured by both Ryanair and IAG that they are among the best capitalised and cashed-up airlines in Europe.
Those in the industry say giving back the cash would endanger some European airlines but not Ryanair and IAG. However, they say it would have a material impact on their cash reserves as they go through the crisis and beyond.
If you have lost your job, you might like your money back now. It is yours and under law you are entitled to it.
If you haven’t lost your job, and your income has not been badly impacted, you might ask what would you do with the cash in the meantime. Put it in the bank and book a holiday with it later? Taking a voucher and using it sometime next year, isn’t such a huge price to pay for some people but it is infuriating for everybody.
Bear in mind if an airline goes under, punters lose the cash refund and the voucher is practically worthless. Airlines would argue that the guy who lost his job wants to find another one. And the best way to do that is to enable the economy to recover and that includes keeping businesses like airlines strong.
If these airlines are so financially strong and want to come back stronger than their competitors, why not give the cash back, and borrow that amount when it all blows over? Ryanair owns 70pc of its own planes. It could borrow €1bn no problem if it were needed.
One of the keys is to get people back travelling again. When countries and flying opens up many might still be reluctant about travelling. What better way to hook them in than having vouchers sitting at home in a drawer?
You may have given Michael O’Leary an interest-free loan