Income investors have been dealt another major blow today as Westpac Banking Corp [ASX:WBC] released its H1 2020 results.
Westpac said it would defer payment of an interim dividend to shareholders after posting a 70% drop in first-half cash earnings following a hefty impairment charge due to the coronavirus pandemic.
WBC’s decision not to pay an interim dividend follows Australia and New Zealand Banking Group Ltd’s [ASX:ANZ] lead last week to forgo paying a mid-year dividend.
National Australia Bank Ltd [ASX:NAB] slashed its interim dividend in a surprise early announcement last week.
With bank earnings down across the board, dividend deferrals could indicate a deepening sense of anxiousness within some of Australia’s largest institutions.
The three banks announced they each would cop impairment charges of around $1.6 billion for potential loan defaults due to the COVID-19 related shutdown.
What does this mean for property in Australia?
Aussie banks have benefitted from strong demand for Australian property, spurred on by 27 years of recession-free economic growth.
During this time, household debt ballooned to 120% of the GDP.
As of 2018, Australian banks’ mortgages were equivalent to 80% of the GDP.
Now, with some impacts of COVID-19 yet to be fully realised, the economy is on course to retract.
Meaning those Australians who are up to their eyeballs in debt could subsequently default on their loans.
Which goes some way to explaining why the banks have set aside the impairment charges.
It also means that the banks might be more conservative when lending money.
In fact, banks have significantly reduced the number of loans since 2017 thanks to changes in lending standards brought on by the Hayne Royal Commission.
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Westpac today revealed that it would defer repayments on $39 billion worth of home loans, which is 7% of the bank’s mortgage customers.
With NAB and ANZ in a similar boat, deferral of home loan repayments could mean the banks have less cash to lend to ‘mum and dad’ investors or first-time buyers.
Good news for property prices?
The impact of Australia’s faltering banks will depend of what kind of investment you’re looking at.
The economic impacts of COVID-19 have led to fears of weak housing demand and falling property prices.
Property sales in Australia plunged by about 40% in April.
But this hasn’t translated into a fall in house prices yet.
Source: Property Update
Most capital cities saw marginal increases in property values of the last month, with every capital recording an increase over the last quarter.
However, this could be due to a shortage of property supply — something we flagged as an important factor on Friday.
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