Australian banks' loan deferral extension targets 'cliff' risks: Fitch

It will also give borrowers headroom to examine their financial conditions.

The extension of repayment deferrals by up to four more months will give Australian banks headroom to assess COVID-hit borrowers’ financial standing and will target “cliff” risks for 2021, according to a Fitch Ratings report.

The extension will also give borrowers ample time to sort out their finances but it will be granted on a case-to-case basis. They will have to cooperate with banks to ensure that they can resume repayments through options like converting to interest-only and extending loan terms.

“The Australian Prudential Regulation Authority confirmed that deferred loans can continue to be regarded as performing for capital and reporting purposes up to end-March 2021. This limits immediate risk to bank capital ratios, but we still expect capital ratios to fall as asset-quality weakens,” Fitch wrote.

There will still be asset quality deterioration come later this year but the deferral extension means the full extent of the decay may be insignificant in financial statements until 2021, the report said.

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