Post by andrewh on Apr 2, 2020 8:14:21 GMT
I've been asked a few times for my thoughts. Happy to take questions but I won't comment on specific platforms. Here goes...
We live in unprecedented times. The global COVID19 pandemic has swept across Europe at an alarming speed and put our way of life, our liberties, and freedoms at risk. It’s 100 years since the last time a virus affected Europe in such a way but advances in science and our understanding of viruses has created a response like no other that has come before. Governments have had to act, closing borders (so much for Brexit and Schengen!), closing down public activities, and even the extremes of stopping public movement altogether. A war footing against an enemy we can’t even see. But what affect does this have on lenders? How will they cope? What should be their response?
Any restrictions on normal life will have an impact on the economy both nationally and globally. Our planning horizon is no longer the next year but had shrunk to the next week. Holidays are cancelled, car sales fall, house sales stop…it goes on. Who will make long term decisions when we don’t know what next week will bring? This changes the way that lenders have to think and every type of lender will be affected.
My personal view is that we have lost 2020 to coronavirus. Schools are now closed and they are predicting peak virus in May/June. There would be no sense in sending children back to school in July for a few weeks. Therefore, it will be September at the earliest before we see any sense of normality. Businesses will not be able to trade properly, and the property markets will come to a standstill. There are dates in history that freely come to mind. 1066, 1815, 1914-18, 1939-45, 1966. This year, 2020, will be a date that is seared into world history.
So what about the lenders?
Consumer lenders will be hit. Borrowers will lose their jobs, purse strings will be tightened and surplus cash used to save for the future. This will result in a higher level of defaults for consumer lenders as the borrowers struggle to come to terms with the new financial reality. This puts pressure on the balance sheets of lenders as they lose income, thus affecting their profits, but also lose cash when the borrower can’t repay. Lenders will naturally look to restrict lending to protect their own balance sheet.
But it also creates opportunity. Borrowers who have little debt may seek to take loans in order to supplement their income or to provide a buffer during the coming months. Lenders must be wary when assessing these new loan opportunities. Most of the credit file data is based on historic information and the borrower’s circumstances may have fundamentally changed.
Business lenders will be facing uncertain times. Never before have we seen a freeze on normal business activities. The hardest hit are those in the hospitality and entertainment industries. Hotels, bars, restaurants, cinemas, sports clubs… the list is a very long one. There will be business failures.
For lenders this could be a disaster. Defaults reduce income for the lender and losses could reduce the capital they have to lend. Many business lenders operate on an unsecured or lightly secured basis. Put simply, they are at risk of extensive losses. Secured lenders are still at risk. Business assets such as stock and invoices are volatile and could be rendered worthless. The UK Government has pledged £330bn in support for businesses to keep them trading. Will this be enough?
But again there is opportunity. There is a requirement for liquidity, for funds to fight through this period and to survive. The challenge for lenders will be assessing those businesses that have the capacity to survive. Businesses in key sectors like distribution and healthcare are likely to be given whatever it takes from the Government in order to keep the country going.
Property lenders face a series of unique challenges. Borrowers may struggle to repay the loans either because their personal income is reduced or because tenants cannot afford to make payments. Because of this, the property markets will grind to a halt and there is already evidence of sales falling through, a drop in demand and the rental market stalling. The Government has already instructed that people with mortgages can have a 3 month repayment holiday. It will soon be law that tenants cannot be evicted in the current crisis. All of this will impact on property lenders.
Historically, property lenders have had minimal losses due to the nature of the assets they have. But when the loan goes wrong in this environment, what can lenders do? There is a limited market for sales and commercial or industrial properties will be impossible to sell. A lender is less likely to exercise their rights and take possession of the property because if they do all the risk of ownership pass to the lender. They are responsible for the costs and insurance of the property. They might want to do that on residential property and rent it out but there are substantial risks with that strategy.
Banks will be worst hit by this. The capital they hold is governed by calculations on their risk weighted assets. Put simply, the higher the level of risk, the more capital they have to hold. A defaulted loan is classed at the highest risk level which is why a bank will dispose of the asset as quickly as possible. In this market they cannot do that. Alternative lenders do not have this issue. They are able to hold an asset and wait for the market to recover before they dispose of it.
I predict that there will be a huge increase in forbearance on property loans. The banks may even “normalise the position”, put it on to favourable terms to reduce the risk, at 0% interest rates just to manage their risk weighted assets. I predict that many lenders will not foreclose at all but will wait to see what the economy does in the coming weeks and months.
This is, indeed, incredible times.
We live in unprecedented times. The global COVID19 pandemic has swept across Europe at an alarming speed and put our way of life, our liberties, and freedoms at risk. It’s 100 years since the last time a virus affected Europe in such a way but advances in science and our understanding of viruses has created a response like no other that has come before. Governments have had to act, closing borders (so much for Brexit and Schengen!), closing down public activities, and even the extremes of stopping public movement altogether. A war footing against an enemy we can’t even see. But what affect does this have on lenders? How will they cope? What should be their response?
Any restrictions on normal life will have an impact on the economy both nationally and globally. Our planning horizon is no longer the next year but had shrunk to the next week. Holidays are cancelled, car sales fall, house sales stop…it goes on. Who will make long term decisions when we don’t know what next week will bring? This changes the way that lenders have to think and every type of lender will be affected.
My personal view is that we have lost 2020 to coronavirus. Schools are now closed and they are predicting peak virus in May/June. There would be no sense in sending children back to school in July for a few weeks. Therefore, it will be September at the earliest before we see any sense of normality. Businesses will not be able to trade properly, and the property markets will come to a standstill. There are dates in history that freely come to mind. 1066, 1815, 1914-18, 1939-45, 1966. This year, 2020, will be a date that is seared into world history.
So what about the lenders?
Consumer lenders will be hit. Borrowers will lose their jobs, purse strings will be tightened and surplus cash used to save for the future. This will result in a higher level of defaults for consumer lenders as the borrowers struggle to come to terms with the new financial reality. This puts pressure on the balance sheets of lenders as they lose income, thus affecting their profits, but also lose cash when the borrower can’t repay. Lenders will naturally look to restrict lending to protect their own balance sheet.
But it also creates opportunity. Borrowers who have little debt may seek to take loans in order to supplement their income or to provide a buffer during the coming months. Lenders must be wary when assessing these new loan opportunities. Most of the credit file data is based on historic information and the borrower’s circumstances may have fundamentally changed.
Business lenders will be facing uncertain times. Never before have we seen a freeze on normal business activities. The hardest hit are those in the hospitality and entertainment industries. Hotels, bars, restaurants, cinemas, sports clubs… the list is a very long one. There will be business failures.
For lenders this could be a disaster. Defaults reduce income for the lender and losses could reduce the capital they have to lend. Many business lenders operate on an unsecured or lightly secured basis. Put simply, they are at risk of extensive losses. Secured lenders are still at risk. Business assets such as stock and invoices are volatile and could be rendered worthless. The UK Government has pledged £330bn in support for businesses to keep them trading. Will this be enough?
But again there is opportunity. There is a requirement for liquidity, for funds to fight through this period and to survive. The challenge for lenders will be assessing those businesses that have the capacity to survive. Businesses in key sectors like distribution and healthcare are likely to be given whatever it takes from the Government in order to keep the country going.
Property lenders face a series of unique challenges. Borrowers may struggle to repay the loans either because their personal income is reduced or because tenants cannot afford to make payments. Because of this, the property markets will grind to a halt and there is already evidence of sales falling through, a drop in demand and the rental market stalling. The Government has already instructed that people with mortgages can have a 3 month repayment holiday. It will soon be law that tenants cannot be evicted in the current crisis. All of this will impact on property lenders.
Historically, property lenders have had minimal losses due to the nature of the assets they have. But when the loan goes wrong in this environment, what can lenders do? There is a limited market for sales and commercial or industrial properties will be impossible to sell. A lender is less likely to exercise their rights and take possession of the property because if they do all the risk of ownership pass to the lender. They are responsible for the costs and insurance of the property. They might want to do that on residential property and rent it out but there are substantial risks with that strategy.
Banks will be worst hit by this. The capital they hold is governed by calculations on their risk weighted assets. Put simply, the higher the level of risk, the more capital they have to hold. A defaulted loan is classed at the highest risk level which is why a bank will dispose of the asset as quickly as possible. In this market they cannot do that. Alternative lenders do not have this issue. They are able to hold an asset and wait for the market to recover before they dispose of it.
I predict that there will be a huge increase in forbearance on property loans. The banks may even “normalise the position”, put it on to favourable terms to reduce the risk, at 0% interest rates just to manage their risk weighted assets. I predict that many lenders will not foreclose at all but will wait to see what the economy does in the coming weeks and months.
This is, indeed, incredible times.
