The latest data reveals the financial and insurance service industries have the highest probability of default
Thanks to the support measures and leniencies enacted by lenders and other financial providers during recent periods of lockdown, the majority of impacted households and businesses have been able to keep their heads above water for much of the pandemic. But this hasn’t been without consequence for the financial services sector.
A recent report has placed financial and insurances services high on the list of industries with a probability of default. According to CreditorWatch’s September Business Risk Index, the financial sector ranked third on the list at 4.1%, behind food and beverage services at 5.9% and arts and recreation services at 4.3%. On the findings, chief economist Harley Dale told MPA that the financial and insurance services industries were currently operating in “a somewhat artificial environment.”
“Throughout the COVID period over more than 18 months now, there has been widespread support and leniency shown to households and businesses,” he said. “A number of banks have provided mortgage holidays or have allowed for more generous repayment conditions in a contemporary sense and have helped households keep their heads above water.
“Even more tellingly than that, there have been considerable leniencies shown towards businesses in what has been an extremely difficult time in the ability to pay creditors, for example, when many of these businesses haven’t even been able to open for some considerable time.”
At the height of COVID this year, more than half of the country’s population was in lockdown. This impacted an enormous number of households and businesses, particularly SMEs, he said.
“To its credit, the financial and insurance service industries, together with the Australian Taxation Office, have undertaken the appropriate policies to support people in difficult times,” he said. “But that can’t last forever. At some point, that leniency is going to come to an end – hopefully in a measured way rather than flicking off the switch.
“We certainly need to recognise that at some point, these more favourable conditions that businesses and households have been able to operate under in 2021 are going to come to an end and that’s going to put pressure on the industry.”
According to APRA, temporary loan deferrals jumped in August this year, particularly in the lockdown-impacted regions of NSW and Victoria. While the value of loans in deferrals stood at $11.9 billion, this represented a mere 0.5% of the value of total loans, which was significantly lower than the 10% peak recorded in the middle of last year.
Read more: Loan deferrals jump in NSW, Victoria
Despite the strong demand for online delivery during lockdown, the transport, postal and warehousing industry ranked third on the list of industries in payment arrears at 10.7%, coming behind construction at 12.4% and accommodation, food and beverage at 11.1%.
Dale said that the overarching impacts of COVID had had adverse consequences for the supply chain, which partly explained why the industry had suffered a high level of arrears despite the popularity of online shopping.
“Those delays cost industries money,” he said. “But I think the main thing is that despite the fact we’ve seen this really big volume of trade happening through home deliveries, it doesn’t, in and of itself, compensate for the level of lockdowns that we’ve seen across the country that rely on warehousing that in turn needs to be distributed to them.”
Since non-essential retail and food and hospitality have been heavily impacted by COVID shutdowns, a reduction in demand for these types of goods has meant less turnover of stock, which has resulted in a reduction in demand for transport, shipping and storage for traditional retail and food services.
Read next: CBA issues warning as economy reopens
“As lockdowns ease, you can’t just flick on a switch and ramp up the whole warehousing distribution system overnight,” he said. “It’s going to take time to get the wheels in motion again and meet the demand of lots of different small and medium sized businesses for goods and products that they haven’t had any demand for.
“That’s why that industry pops up in terms of a high-risk industry when you look at payment arrears.”
From a geographical perspective, the regions most at risk of default have been the ones most heavily impacted by lockdowns. In NSW, the greater western Sydney areas of Merrylands to Guildford, Bringelly to Green Valley and Canterbury measured 7.76%, 7.66% and 7.53% respectively, while QLD regions reliant on domestic and international tourism, Gold Coast to North and Coolangatta, measured 7.74% and 7.45%.