The medical effects of coronavirus (Covid-19) on Australia are still building, with caseloads rising and likely to continue doing so for some time. While still early days, indicators are that short-term bank profits will plummet, loan growths will stall, impaired loans will begin to rise and the industry will see further consolidation, according to GlobalData, a leading data and analytics company.

GlobalData examines the effects of the global financial crisis (GFC) for clues as to the impact on banks and the financial health of the nation, with implications not just for Australian banks but all mature banking markets facing down a Covid-19 recession. While a very different shock, there are lessons to be learned that suggest some short-term and long-term considerations for Australian banking

Andrew Haslip, Head of Financial Services Content for Asia-Pacific at GlobalData, says: “The internationalization of the financial crisis in September 2008, when it first became a clear and present danger to Australia, did not result in the bottoming out of the Australian Securities Exchange (ASX) until February 2009, five months later. It is highly unlikely that the ASX 200 will have seen its bottom in March from a crisis that only started in February; current modeling suggests that late Q3 is more probable.”

Unemployment also roughly peaked at 6% in early 2009 and remained elevated until Q1 2010, before beginning a downward trend with a more energized global economy.

Haslip adds: “Here, the unemployment rate, even with government stimulus, is already predicted to be many times what it was previously, and it is suggested that only in Q2 can the true impact of Covid-19 on the economy be measured. Unemployment will be elevated for at least a year and will still need accommodation well into 2021.”

GlobalData reveals that government efforts to provide temporary income to the millions thrown out of employment will work in the short term and hold down the impaired loan ratio for the first half of 2020, but pressure will be on lenders for many months following.

Haslip explains: “Loan growth will also suffer, despite efforts to keep lending to businesses and households at extremely attractive rates. The Reserve Bank of Australia and government funding to lenders will help, but it is highly uncertain whether there will be sufficient appetite for credit to see anything more than marginal increases in 2020.

“New residential mortgage lending will collapse during the weeks, possibly months, of lockdown and enforced social distancing as even viewing a property safely becomes a challenge. Spending, barring panic-buying, will decline and businesses will be hesitant to take on even attractive loans when they have no income.”

GlobalData expects the quarterly profits of banks to drop precipitously, most dramatically among the largest banks but with a more enduring squeeze on smaller authorized deposit-taking institutions (ADI) that results in the long-term consolidation of the market.

The recent upswing in ADIs, driven by the launch of neo-banks, appears set to reverse. The next five years could see up to a quarter of ADIs exit the market via sales or mergers.

Haslip concludes: “Given the expected scale and length of the disruption to the Australian economy, it’s no surprise that key banking indicators will suffer. The government stimulus measures for the banking sector and broader economy will limit the fallout.

“What will be enduring is the effects that mass unemployment, possibly long-term, will have on lending and the increased use of automatic digital decisioning on loans. Large swaths of Australians are about to become non-standard risks and lenders are going to have to be able to roll with that for years to come – those that can adapt will be among the fewer lenders that we see in 2025. It is a tale that mature banking markets around the world will be telling as they endure their own version of the Covid-19 recession.”