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Negative Business Credit Growth Compounds Bleak Bank Reporting Season

Negative Business Credit Growth Compounds Bleak Bank Reporting Season

(06 August 2020 – Australia) Australian banks face a challenging reporting period in August as they balance the expectations of shareholders and regulators against a worsening economic outlook as strict Victorian lockdowns sap confidence.

The Reserve Bank of Australia (RBA) has reported a second monthly contraction in business credit growth coupled with ‘very high’ uncertainty stemming from the COVID-19 crisis diminishing demand for new borrowings. ANZ Research attributed the sudden reversal in business lending conditions to high levels of uncertainty, which it said would continue to drag down business lending volumes into Q4 2020.

According to the latest Financial Aggregates data from the RBA alongside the Australian Prudential Regulatory Authority’s (APRA) monthly banking statistics for June 2020, total credit growth contracted by 0.2 percent in June following a 0.1 percent decline in May. The subdued result was driven by a sharp contraction in business credit growth, which fell 0.8 percent in June following a 0.6 percent decline in May.

This marks the third consecutive month of disappointing business lending demand following a surge in activity at the onset of the COVID-19 crisis as businesses boot strapped their balance sheets, driving a record high month-on-month growth of 3.1 percent in March.

“We anticipate a renewed wave of charges in 2020-21 as the full impact of the recession is felt which leads to a ‘W’ shaped earnings recovery. The key to the banks’ performance will be Australia’s small businesses, which may drive unemployment and house prices, as well as the level of government stimulus. Overall, we expect this reporting season to provide significant insights but little clarity on the outlook. The outlook for the economy and banks has deteriorated sharply. After a strong bounce from May until early July, Melbourne moving to a stage four lockdown until mid-September is a clear setback” commented UBS analyst Jonathan Mott.

“With uncertainty very high given the current virus outbreak, we struggle to see many new business loans occurring and, as a result, we expect further falls in business credit. With our expectation for unemployment to rise even further and wage growth to remain subdued, we anticipate housing credit growth will continue to slow and then turn negative over the next 12 months” ANZ Research said in a statement.

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