LONGREAD: understanding repayment deferrals

Mark Hand is one of ANZ’s most experienced bankers. As Group Executive – Australia Retail & Commercial, he has an intimate knowledge of how the bank is helping customers access relief through the COVID-19 pandemic. In the broad ranging Q&A below, he discusses this relief and the broader economic impact he is seeing across the nation.

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" About 20 per cent of customers who called us wanting to explore this package, after the conversation we had with them, decided that wasn't the right thing for them to do.” – Mark Hand

Andrew Cornell: There’s been considerable discussion around the deferral programs on loan repayments that were timed to go with the government relief packages, applying to both retail and commercial customers. Deferral though is not a waiver so can you give us some context?

Mark Hand: It is a deferral of payments, not a waiver, and they were offered at a time when customers were uncertain about how their income was going to pan out over the coming months. Whether that's a small business or an individual, there was a lot of nervousness, particularly with the severity of some of the lockdowns elsewhere in the world.

For many the natural response was ‘I could be in real trouble here’. That might be because my business stopped overnight or my customers can’t pay me for work I'm doing. Maybe it's my employment.

So the package we put in place was to allow people to get through this period of uncertainty. But a deferral is quite different to a waiver. A waiver would mean you don’t have to pay the bank that money. What this is saying is you do – at a later date.

We’ve allowed payments to be put on hold to help customers manage their cash. But interest still accrues on your loans and it gets capitalised - it gets added to the balance. In practice it is adding to the term of your loan, whether that’s a 20-year mortgage or a seven-year facility you've got to run a small business, it adds a bit of time onto the end of that. The balance of that loan will rise to the extent the deferred payments are added to the principle.

Flattening the curve

AC: In Australia and New Zealand the health authorities and the government acted quickly and therefore the much feared steep curves of infection and fatalities seen overseas didn't occur here. So, fingers crossed, the position is better than we thought. Has that flowed through to how customers have responded and how you're seeing customers behave?

MH: It has. It's been staggering to see the low numbers. Australia and New Zealand have done an exceptional job. And that has definitely played out in what we are seeing and hopefully will see.

At the outset, we had a lot of customers expressing interest, inquiring about our packages. Early on we reported some numbers about the number of applications at the time – but these weren’t formal deferrals. They were inquiries or registers of interest from customers who wanted to have that conversation with us about putting payments on hold and what arrangements we could come up with.

Some of our competitor banks reported actual deferral packages put in place so our numbers initially looked a little bit out of whack with the market at that point. As it's panned out, as we've had those conversations with customers, our numbers are very similar to what we see in the market in terms of the customers who did go ahead and put payments on hold.

About 20 per cent of customers who called us wanting to explore this package, after the conversation we had with them, decided that wasn't the right thing for them to do. They wanted to know what was available but decided they didn’t need to go ahead.

Once we talked to them about other options - and a lot of customers had other options, many had savings in place or saw their income hold up - they realised their income was a little more certain than they expected. So we're seeing customers who had expressed interest but then did not opt to enter into a deferral arrangement.

Now we’re also seeing some customers call us to unwind the arrangement because they've got some certainty, they've got that confidence going forward. So we're starting to see a few customers every day, more and more, calling us to see if they can unwind the arrangements.

In rough numbers, about a third of our customers who took a deferral are making some payments – not full payments – although nearly 5 per cent are now back to making full payments.

We can see income trends for different cohorts in our data base and we can see a large number of them have not had the income reductions they anticipated.

Now some of those still went ahead, perhaps saving for a rainy day, taking advantage of the three-month deferral and then potentially the six-month deferral.

Some want to have money set aside in case of another wave of infection and we go into another lock down. Maybe if you’re a builder, for example, the deferral was to take account of the fact you might have had contracts that you know are ending but you're not sure you're going to get another contract in three, four, five months. You don't know if as many people are going to be out requiring your services.

But we are seeing quite a shift in customer outcomes from what was expected. People are being cautious - and it was wise to enter a package until we had some certainty - and now we’re seeing some moving back out.

Customer outcomes

AC: Can you give us a rough idea on both the retail customer side and the commercial customer side?

MH: There are considerable differences in the sectors and we always knew that. Some small businesses' income, in particular, stopped overnight - this was primarily going to be more heavily felt in the small business space.

A big percentage - it's about a quarter - of our mortgage customers are small business people who are depending on income from those businesses. A large number of our customers have salaries that come from working in small businesses. So it's not surprising that small business is the crux of the issue.

But when you look across our business, less than 10 per cent of our consumer customers have taken some form of arrangement. We primarily look at the home loan book because that's where the larger values are but it's under 10 per cent.

It's similar numbers across credit cards or personal loans. But we have different, much more bespoke, arrangements or discussions with those customers because it's very different talking about a 30-year mortgage to talking about a facility where you might have nine months to run on a personal loan.

With our credit card packages, often customers have chosen to freeze their balance, freeze their account, so they can't use it. Now we've discounted the rates they pay because of that. So it's more affordable and they've stopped using that card. That decision can lead to quite substantive changes to their expenditure patterns.

In the small business space, the number is more like 15 per cent who have taken the package - around $10 billion out of our almost $A60 billion of lending. So it's much more heavily felt in that space than in the consumer space.

Opting in

AC: Different banks took different approaches to rolling out these packages didn’t they? At ANZ, it was the customer’s decision to opt in.  And then there was an actual conversation with the customers about each one?

MH: That's right. Not all banks did it the way we did. Some chose, particularly in the small business space, to opt their customers in and give them the deferral because they felt that was the right thing.

I don't think a deferral was the right thing for every customer because every customer is different. What we felt we needed to do was give the customer the option. And to make that decision, they actually needed to know the full range of options available to them.

So do they want to put the payments on hold? Do they want to move to an interest only facility potentially so that they just lower their repayments? We have a large number of our customers who are actually ahead on their repayments and so they can go into the system and just lower the repayments themselves.

Even as interest rates were coming down, many were still making the same repayments. So now they can choose to lower their repayments or keep them where they are. Over the years many have kept them where they were so now they’re ahead, they have a buffer.

We've got customers who had money in offset accounts. We've got customers who have paid down mortgages and were able to redraw on some of those facilities. So there's a whole range of options.

That was why we thought the best thing to do was to talk to the customer. And remember, we get back to that point before, it's a deferral, not a waiver. The interest capitalises and continues to be added to the balance. For a lot of customers, their preference would be to lower the repayments but continue to make inroads.

Every customer is different and having that conversation gives us the opportunity to at least satisfy ourselves customers thought it through and made a decision about what's best for them. It’s not just one blanket policy.

AC: It's not necessarily the case then that taking a six-month deferral is in everyone’s interest?

MH: It's not because, in reality, some people are going to have less income on the back of this crisis. We can see from our data the amount of money coming into our customer accounts, as a total population, in the form of salary and wages, has fallen by about 9 per cent overall. So, as a population, our customers are earning less.

Now, probably there's no one who is actually earning 9 per cent less. There'll be a lot of customers that have dropped to zero because they've lost employment or their businesses have closed. And there are lots of customers who have lost 20 to 30 per cent because they might have had their hours cut back. They've lost overtime or they've gone from five days a week to four days a week.

Every customer is different. There are lots of customers whose income is still at 100 per cent of what it was. And we've got lots of businesses that have actually boomed in this time. Bike stores have run out of stock. Bakers, butchers, have seen sales climb as people are cooking at home a lot more. We've seen the queues at supermarkets. A lot of business have done particularly well and are in much better shape - but probably still started out uncertain about what was going to happen.

But other customers have found it to be much harder than they anticipated. So, for each of these customers, we’ve got to make sure we work through their scenarios.

In some cases, it’s not the right thing to just run up debt in this time. On the retail front, we know, for some customers, the credit card they have with us hasn’t been used for more than two years, it’s possibly their third or fourth credit card.

But it is not wise, if you've lost your job, to start running up debt on a credit card that you've never used before. So we've written to those customers to say we don't think they should use that card and we should cancel the limits. It would be irresponsible to allow those customers to access debt that has not been part of their normal cash flow cycle. It would put them further into debt - on the hope that in six months’ time everything's okay.

We just don't know for every customer what it's going to be like in six months. Unfortunately for some, it won't be good in six months’ time. They won't have found work. Or their businesses won’t recover. We can't allow people to go further into debt and just kick the can down the road and potentially even make it worse.

Healthy economy

AC: The big picture here is it's in ANZ's - and every bank's - interest for the economy to be as healthy as it can be. Which is obviously not going to be as good as 12 months ago. Yet you can’t create false expectations that suddenly everything will be okay. You still have to support the government policy, support the economy, support customers, and still be a prudent banker?

MH: Exactly. Coming into this - and this was another hard message for some customers – there were some customers in financial difficulty before COVID hit. We believe with some of those customers who were behind in their payments by a significant amount it is not the right answer to just give them a holiday on repayments and hope that in six months something is going to change.

Those businesses that were already struggling are not going to be suddenly viable in six months. Whatever the cause of these issues that have put people behind, they aren’t going to go away with a six-month deferral. So that is a different conversation.

With those customers, again, we've had specific conversations about their scenario. We have hardship programs and approaches that we apply to our broader customer base and we continue to apply those.

It’s the same with business customers. For some business owners, the smartest thing for them to do is to wind it up now and walk away with some equity. There are businesses that are broke now and have no chance of survival but have been given a six-month stay of execution. They will hope that the Christmas trading period will deliver a miracle and they’ll survive – but not everyone will.

Running out

AC: These programs and the government programs are due to run out in September, there’s been a six month “hibernation” as the government was saying. Now you’ve been having these conversations all along but what are your expectations about that period around September?

MH: We can see which customers have had income which is better, the same or worse than what they experienced leading into this. And some customers have made the decision to come off the packages, go back to payments – they’ve made that decision, we’re not asking them to.

For consumers, there is a three-month checkpoint. For business, it’s the six months. We’ve been using analytics and while, at the moment, it’s still a bit early to tell, we're at the stage now where we're starting to form a view of the pattern of income for our customers - post the pandemic and post the shutdown requirements.

Some customers are ringing us and asking to vary their arrangements. And in most cases, that's to come off the packages. But there’s a range of options we're looking at, for each cohort of customers. Since around April 22, the daily request volume has steadily increased from about 6 to around 30 per day.

But clearly the conversation with people whose income hasn't been impacted after three months will be very different to someone who we can see has lost their income.

AC: And what about what you are seeing with commercial customers, given the health outcome and hence the economic outcome has not been as dire as feared?

MH: The economic impact is not as bad as first feared as significant government support has become a feature of this crisis.

When we look across our commercial book, some industries such as accommodation have been particularly hard hit. Others such as those mentioned earlier have fared much better. You might look at the income of our commercial customer base and say it's not off that much, what really matters is there are some customers that are in very good shape and some customers that are in very poor shape.

We need to dissect that and understand which ones we need to have the conversations with way before the six months is up about how they're thinking about coming out the other side.

In some cases, they've got rental payments deferred. They've got JobKeeper to assist them retaining staff. They've got bank payments that are deferred. At some point in the next few months, those payments start to return. We need to understand what prospects the income has of returning. They're the ones we need to talk to.

AC: Do you have a sense of the scale of the potential issue? Are you comfortable with all your settings, your risk management, given the tough outlook?

MH: We're as comfortable as we can be and we've learned a lot of lessons from past crises. It is going to be a very intensive period over the next couple of years. We are resourcing our areas like our hardship teams to have those conversations, we're reskilling lots of staff to be able to have those conversations.

Often that's a distressed customer who we're speaking to who might not have the financial literacy and will really need to have a lot of empathy shown. We've got to make sure we've got people who are distinctly capable of having those types of conversations. And you can imagine, for staff, they are also emotionally draining conversations to have with customers when you hear their stories and the impacts they've had to face.

We have to be prepared for that, to have those conversations, even if they’re hard, in the most caring and understanding way we can. We can’t wait six months. We need to start these conversations with customers now. The question for us is how do we get in front of the problem and give our customers the best chance of walking away with some capital.

Counting the numbers

Deferrals were opt-in for ANZ customers, not automatic. It was in the interest of customers to understand the implications and options. Customers also had to be current (less than 30 days past due for payment) at time of deferral. Below is a breakdown of the customer interest.


    - As of April 20th, 15 per cent (19,000 customers) of Commercial Banking lending groups had been provided assistance via payment deferrals and overdraft increases. This increased to 18 per cent as at May 15th May.

    - As of April 20th, total requests for relief was 42,000, now increased by 24 per cent to 52,000 requests. This included Hardship, Payment deferrals, OD increases and Asset Finance.

    - In total 25 per cent of lending accounts (61,000) have had some form of relief requested at 20th May. This figure includes all types/channels also including Merchants, SME Guarantee, and JobKeeper.

    - We have approved relief for 20 per cent of all lending accounts.

    - Of $A56 billion of Australian commercial division gross loans and assets (GLA) roughly $A10 billion of facilities are subject to COVID-19 assistance packages.

    - At the interim result, ANZ took a $A413 million provision charge for the half ($A250 million collective provision and $A163 million individual provision). Total provision balances are $A1.524 billion, an increase of $A269 million since 31 December 2019, driven primarily by increased CP to reflect the forward looking impacts of COVID 19 (note - the $A10 billion is the loan balances associated with the loans that have been deferred and doesn’t/may not represent the entire exposure of a customer that has taken that deferral).


    - 14 per cent of home loans had applied for a deferral at April 24th. Applications have increased subsequent to the 1H20 disclosure by around 10 per cent.

    - Around 20 per cent of home loan accounts that have requested assistance have then elected not to take up any assistance offering.

    - About 80 per cent of Retail customers have seen their income remain unchanged. The remaining ~20 per cent have experienced a reduction of salary income of 20 per cent or more.

    - Around 7 per cent of ANZ’s total Retail customers for whom we can identify income are not receiving salary income. Around a quarter of that 7 per cent are however receiving JobSeeker benefits

Andrew Cornell is Managing Editor of bluenotes

For more information about ANZ’s relief packages for customers click here.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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