Question
The Australian government has shut down the economy in response to COVID19, resulting in millions of Australian being unemployed and under-employed. Many of these newly
The Australian government has shut down the economy in response to COVID19, resulting in millions of Australian being unemployed and under-employed.
Many of these newly unemployed have home mortgages with banks, which now face growing liquidity/operational/credit market/ interest rate risk from such customers who are no longer able to meet their repayments. The RBA has also mandated new financial regulation that requires banks to freeze mortgage repayments for up to six months. Holding all else constant, this lack of income for an extended period, whilst still having to meet all business obligations, causes a challenging increase in operational/market liquidity/interest rate/credit risk.
In order to maintain the confidence of government and the public, banks have started to lowerbuy backraise new equity, that provides profitability/ capital adequacy/liqudity management and signals that growing bad debts can be absorbed. These extraordinary operating conditions places upward/downward/neutral pressure on bank profitability, where the Total Assets/Interest Received/ Interest Paid component of Net Interest Margin (NIM) faces clear contraction.
For example, by 2019 end, NAB's NIM was 1.8%. Given that total assets remain largely unchanged in 2020 at $847 billion and half-year profitability of interest received less interest paid is set to fall by -$1.4 billion, the June 2020 NIM of NAB is expected to be 1.59%/1.61%/1.65%/1.63% .
While the financial regulation that allows for mortgage repayments to be frozen for up to 6 months is designed to ease the credit /operational/interest rate/liquidity market risk faced by the newly unemployed, the frozen repayments will simply be added back to the balance of the loan, resulting in lower and longer /higher and shorter /lower and shorter/higher and longer loan repayments and loan terms respectively.
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