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DAWSON Asset quality has been more resilient than we thought it was going to be six months ago, and certainly better than we expected in March. Mortgage and SME deferrals have reduced significantly over the last few months, which has been pleasing. Mortgage deferrals peaked at around 12 per cent of our book and they are now around 3 per cent – clearly a massive improvement.

Government and central-bank stimulus measures have allowed many businesses and consumers to see out COVID-19 restrictions and return to repayments quicker than we were expecting in March and April.

There is still some uncertainty as we look at the book going forward, though. Stress has emerged in sectors that have been severely affected by COVID-19.

ROBB Commonwealth Bank of Australia (CBA) peaked at 11 per cent for home-loan deferrals and as of 31 October is at 4 per cent. SME-loan deferrals peaked at 28 per cent, largely driven by the fact that we auto-deferred large segments of our book. We have seen this come down to 3 per cent.

We have been encouraged by the transition but I agree that there is still a way to go. The June quarter 2021 will be key, as this is when we will see the fiscal stimulus and deferral packages wrap up. We are already working closely with our customers to help them through this process.

Over the past year, we have doubled the number of people in our financial-support team. We now have an additional 700 employees helping customers to figure out the best path forward for them. There is certainly a lot of work to do but we are encouraged by the outlook versus expectations six months ago.

MEHARRY There was a much bigger proportion of deferrals referred to hardship coming from Victoria, as one would expect as a result of the harsher lockdown – 40 per cent of home loans referred to hardship and more than 50 per cent from businesses referred to hardship came from Victoria.

There has been a rebound in the economy since Victoria has opened up over the past five weeks but, again, it is probably too early to know what is going to play out in 2021.

We are positive, though. We expect another reduction of deferrals in November and we are pleased with how they are progressing – 90 per cent of those that have exited deferrals are expected to resume or have resumed payment. But I agree that it is hard to make a call that we are completely out of the woods until the June quarter 2021, when we see the removal of some stimulus.

WENT There is no doubt the performance of the deferral cohort has been better than we were anticipating. For us, 80 per cent of these mortgage customers have returned or will return to normal payments while approximately 20 per cent have sought the additional four-month extension.

Around 50 per cent of those seeking an extension were in Victoria. It was still in lockdown when a lot of the initial deferrals were coming up to maturity, so this is not surprising.

The SME and commercial space is also on a positive trend. Around 10 per cent of those who applied for an initial deferral have sought an extension, heavily weighted toward Victoria. The trends in New Zealand have been even better in this space.

The other thing to point out is that the institutional book has been resilient. When we announced our results in April-May 2020, we were anticipating well over 100 basis points of risk-weighted-asset migration including from downgrades of our institutional customers.

At our most recent update, it is probably about half that – and a lot of this is due to improvement in the institutional space. These clients have managed their businesses well and have in some cases raised equity if needed – it feels as if they are in good shape.

WENT Credit growth is subdued at the moment. Mortgage loan growth is about 3 per cent year-on-year – though we have been tracking slightly above this – and credit growth in the business sector is close to flat. Our view is that, in line with improving conditions and confidence, we should see a bit of a pick-up in business and household credit demand. But overall it will remain subdued.

We also think the institutional source of growth will remain subdued, thanks to the massive amounts of liquidity out there and good direct access to debt capital markets for high-grade borrowers.

The other area to highlight – although it is not a big component of our portfolio – is credit cards. They are down 13 per cent year-on-year and we are seeing this impact in customer behaviour.

MEHARRY We don’t expect a surge in credit growth across the economy though the housing market may start to pick up with such low rates. Looking across to New Zealand, the house-price surge is indicative of what we might expect to see here. I am not expecting double-digit-type growth in credit, but we feel housing growth will be stronger than business growth – which to date has been quite subdued.

It is a little like what we have seen offshore, in the sense that taking rates all the way down to zero or even negative does not necessarily generate extra growth in credit. I think we need to see things play out to find out where demand comes from, but expectations remain relatively muted.

ROBB Our economists’ view is also that we will see very low single-digit credit growth in 2021. This was a theme pre-COVID-19 and the pandemic has exacerbated it because of the uncertainty that exists right now. There is little confidence to borrow and in many cases credit is not needed.

It’s an interesting dynamic because, in appropriate situations, the bank is keen to extend credit. We have strong liquidity and capital positions so we are looking to work with customers to extend credit, but we are seeing limited customer interest. We are not expecting this dynamic to change in the near term.

DAWSON We are seeing housing respond to low rates – it is a very competitive market. As everyone says, it certainly seems that business confidence is more subdued and we are not seeing any pick-up in demand there.

DAWSON The deposit growth we have seen has been pretty broad-based. When the pandemic started in March the early deposit growth was really coming from the corporate and high-end sectors of the market. Some of it was drawing down on committed lines and putting that liquidity on deposit with the banks.

Following this, we saw deposits increase in response to the government stimulus packages that flowed through to the SME and household deposit books. The early release of superannuation, which we saw around the same time, was also a factor – but it was more about conservatism and a reduction in spending elsewhere.

Looking forward to 2021, I expect deposit growth will remain strong with the continued QE coming into the market supporting it.

ROBB This has been a big focus for us in 2020 and I think it will continue to be a major theme in 2021 too. Understanding the dynamics about where the cash in the system is going and the formats that will make sense – what is going to stick and be maintained in the medium term – is key.

For example, our customer deposit ratio is currently at 74 per cent, up from 69 per cent in 2019 – equating to more than A$60 billion (US$44.3 billion) of deposit inflows in 2020.

From here, we have been doing analysis of the monetary system and supply expectations to assess how fiscal and monetary stimulus could continue supporting deposit inflows. Initially our growth was also mainly from corporates and large fixed-income investors, but now it is very focused on the retail segment.

With these large deposit inflows, at a time when asset and credit growth isn’t really there, the dynamics for wholesale funding have massively changed in the past six months.

WENT Deposit growth has been the single biggest driver of balance-sheet changes to the funding gap over the last eight months. I believe the system funding gap has shrunk by around A$200 billion since February. This is a product of QE and fiscal stimulus, so in a way it is not surprising.

We do a lot of thinking internally about these changes and we have concluded that they are structural. The Australian system had a big funding gap and large issuance requirements offshore. Now it has flipped around and we are all looking for ways to deploy liquidity.

We think it is going to stay this way for a while. The nature of government stimulus will change in the coming months but, overall, it is still expansionary – and so is monetary policy.

MEHARRY While we have low rates, the structural changes are here to stay. It has been hard to have the conversation about deposits without looking at the TFF and CLF [committed liquidity facility], and how they all play out together over the next few years.

Like the others, we have done a lot of thinking in this space because if it is structural change it means different things to all of us. If it isn’t structural, 2023-24 becomes interesting especially when considering refinancing.

PERRIGNON It is pretty similar in respect of the significant liquidity provided by the Bank of Canada to the short end of the market. There has been no TLTRO [targeted longer-term refinancing operations] setup given to the Canadian banks – so no TFF equivalent that would provide them the ability to fund at term. But a significant amount of short-term funding has been given to the Canadian banks.

WENT Last time I looked, Royal Bank of Canada had C$100 billion (US$77.3 billion) sitting with the central bank in the exchange-settlement account. This gives a sense of how material the numbers are in Canada.

PERRIGNON They are huge numbers. But without term support, the desire to maintain a term-funding presence via their normal course of business – in external term markets – remains in place. This is of course different from the Australian market, where we have not seen any senior major-bank issuance.

WENT Bringing it back to deposits, given how material the changes have been, I suspect the amount of issuance we required would have been limited anyway – even without the TFF. The TFF obviously helps, but it is not as material as the excess deposit growth we have experienced.

Looking three years out, it obviously depends what happens between now and then. If we find ourselves in an over-funded position, like we are now, I suspect there will not be too many issues with exiting from the TFF – we can simply allow it to roll off.

If things change in a way that funding needs increase, we will be sensible about it and some pre-funding may be required to manage the maturity profile. But overall it is hard to see us going back to the situation of issuing A$25 billion per year. Maybe we will get there eventually but I think it is many years away.

MEHARRY The interplay is between the deposit piece and whether we believe it will be maintained over the next couple of years. The TFF has offset wholesale funding. We have accessed approximately A$14 billion of the TFF to 30 September 2020, which is almost identical to our runoff of wholesale funding. We will also be looking to access the TFF in 2021 and it will probably result in a similar dynamic.

It is likely beyond the end of our financial year when whether we need to pre-fund or repay maturities starts to become clearer. We are working through all these things but it is a little too early to say. What happens with the CLF also plays into the outlook.

DAWSON I think it is important to recognise how the balance sheet has changed recently. It certainly feels as if there is more flexibility in the system from a wholesale-funding perspective – both short term and long term. The capacity we have allows us a lot more flexibility in how we think about refinancing.

I also reiterate that you cannot underestimate deposit funding. I agree with Adrian Went: in all likelihood the refinancing task will be largely covered by deposits. Our deposit-to-loan ratio is now greater than 80 per cent and in fact, all the banks are at quite strong levels.

The amount of refinancing needed and the banks’ annual wholesale funding tasks should be lower than they have been historically.

ROBB Our TFF access is about A$40 billion currently, including the initial access of A$19 billion. We are still working through the supplementary and additional allocations but, given we are just not seeing asset or credit growth, we are minimising our wholesale funding needs.

This includes short-term wholesale funding. From the peak earlier in the year, we are down by A$40 billion of short-term wholesale funding and we still have considerable excess liquidity globally and locally.

At this stage, we are not too concerned about the refinancing component and I would also say it does not feel like we are going to go back to issuing large volume.

It is probably also worth remembering that part of the issuance we did when volume was much higher was in preparation for the NSFR [net-stable funding ratio]. It feels like a long time ago now, but the switch from short to long stabilised and I think we are in a new normal from an issuance perspective, even as this balance-sheet adjustment settles.

ROBB Investors are still very engaged. They have considerable exposure to the Australian banks and to CBA, and many of them are interested in our tier-two issuance requirements.

We have asked investors if they want to hear from us less because we are not going to be issuing as much, and they understand the supply story – but they are still very keen to stay in touch.

We have tried a few different ways of doing so, obviously it being a different world as we are not getting on planes anymore. We put out a video for bite-size engagement to see if this would be preferable for some investors, particularly offshore, and we have continued to offer group calls and one-on-ones. In the vast majority of cases, investors have been keen to take these up. I have been surprised by the level of interest in engaging with us.

Our investor engagement efforts have positioned us well for a time like this. Investors really do not want to see the degree of connection reduce despite the Australian banking sector’s lower issuance requirements.