Question

The first half of 2020 has been very challenging for the Australian banking sector with major bush fires, then several severe storms (e.g. Canberra hailstorm) and now the COVID-19 outbreak and shutdown of the Australian economy. We have discussed, how the impact these events—particularly COVID-19—has had on the banks as well as how the banks and regulators have responded to the challenges.

You are the team leader of the Strategy and Operations team at the Commonwealth Bank of Australia. The CEO and Board have asked you to write a series of three short memos outlining the impact that COVID-19 has had on the bank and your recommendations for operations in the next 6 to 12 months. Each of the memos will focus on one fundamental risk and should be written independently of the other memos so that each memo is self-contained (e.g. when reading memo 1, you do NOT need to read the memos 2 and 4 to understand memo 1).

Question
Write a memo outlining the impact that COVID-19 has had on credit risk for the bank. Suggest some strategies the bank can use to manage this risk in the next 6-12 months. (Full Details)

Answer 1

Memo 1

The cases of corona viruses is steeply increasing in all over the world and our country is affected by the same. The virus impacts whole economy including the backbone of the economy, majorly banks. This has also led to Global Financial Crisis which will impact the banks and the financial health of the nation.The maturing banks all over the world are facing a downward credit risk due to the Covid-19. The following impacts will be visible like short term loss, growth of the retail loan will plummet, there will be an increase in the percentage of non performing assets. Government efforts to revival may include funding an subsidies in the short term to hold the impaired loan for the first half of the year but still there will be pressure on the lenders. This somehow implies that there will be elevated number of the impaired loand for next 3-4 years.

Memo 2

The leading indicator of the economy has shown an economic downturn form bullish to bearish market as compared to the benchmark ASX 200. This sluggish economy amid Covid-19 will lead to slump in employement growth of the economy which will impact the per capita income of the economy. The reccession due to the lockdown may throw many of the workers and employees out of job. The crisis of 2008 lead to an unemployment peak of nearly 6% in early 2009 and it remained rising till first quater of 2010. The Government practice to provide short term relief by providing regular income will be beneficial only in short term thud there will be need of some startegic funding and employment extraction plan in the long term.

Memo 3

The profit of the banks are going to see a slump for the next two-three quaters and this will be very highly be seen among the large banks of the Australia. With less of deposits taking place and very low amount of retail loan for MSE and SME which leads to consolidation of funds in the long term. the government may support this by cutting down interbank interest rates and cheap funding will help in mitigte the losses and lower profit margin. The next 3-5 years will be very crucial in the revival plan for the economy. The leading indicators implies that the banking sectors will fall leading to higher cedit risk. The enduring effects on banking sector will also be influenced by the mass unemployement and short term loans, with these we will see more digitalized lending and fewer lenders in next 3-5 years.