US banks expect a significant number of borrowers to recommit to normal payment schedules once their forbearance deals expire later this month, senior executives said, adding that many clients had not been as hard hit by the pandemic as they feared.
Between 4 per cent and 22 per cent of borrowers across various types of loans signed up for 90-day payment holidays designed to give households and businesses breathing room as the coronavirus pandemic threatened their livelihoods, according to analysis by Autonomous based on public disclosures.
Whether those borrowers are able to get back on track with normal payments is an early indicator of the level of defaults and loan losses banks are likely to face from a crisis that triggered an unprecedented business shutdown that is now beginning to ease.
Having set aside tens of billions for loan losses in the first quarter, banks have spent recent weeks studying the income patterns of those who opted in to the payment holidays. They have also begun contacting customers who were granted forbearance measures, asking them if they planned to extend for another 90 days.
“We would expect a meaningful portion of that [forbearance] hopefully not to be needed any more,” said Brendan Coughlin, head of consumer lending at former RBS subsidiary Citizens Bank, where 7 per cent of small business and consumer loans were in forbearance agreements at the end of March.
Just 10 per cent of Citizens’ clients who have their paychecks paid into the bank’s current accounts, and who availed themselves of payments holidays, experienced income disruption since the pandemic began. That 10 per cent includes people whose normal incomes were substituted with unemployment cheques. In Citizens’ mortgage business, about 25 per cent of those who applied for forbearance continued to make their normal loan payments.
“We will try to have conversations with those customers around the pros and cons,” Mr Coughlin said. “If they truly don’t need it, it may actually be better for them to get back on a payment scheme and start paying down their interest so they don’t have to push it all out to the end of the loan.”
He added, however, that the bank would be “pretty liberal” in letting people remain in forbearance schemes if their incomes were not reduced but they wanted to save money as a “safety net”.
A senior executive at one of America’s biggest banks said that their early research suggested a 20 per cent fall in the number of mortgage borrowers in forbearance measures once initial terms expired.
About 40 per cent of those who were granted forbearance continued to make full payments on their loans, the executives said, adding that Friday’s far better than expected unemployment data were a further sign that consumers were doing better than anticipated.
The fact that the numbers applying for forbearance were far lower than those the bank originally modelled also made the senior executive “more optimistic” than when first-quarter earnings were reported in April, though they cautioned that it was too early to predict how loan losses would ultimately evolve.
Credit cards could have even bigger fall-offs. Synchrony recently said 75 per cent of its customers who initially took payment holidays had already been able to return to “current” status and resume payment. Amex said it was likely to close its forbearance programme because demand had slowed so much.
The outcome for small business loans, the category where forbearance measures were highest, according to Autonomous’s research, is more uncertain and some executives pointed to an unexpected blow to businesses hit by looting and curfews just as they prepared to emerge from lockdowns.
Across their overall books senior executives at Bank of America, Wells Fargo and US Bank have publicly said that between 25 per cent and 40 per cent of those who were granted forbearance continued making payments. Citigroup chief Mike Corbat told a recent conference that a “significant” percentage of those who signed up to its forbearance programmes made their full payments anyway.
“The most interesting thing to me has been that many people that asked for and received forbearance have continued to make their scheduled payments,” said Jason Goldberg, analyst at Barclays. “Still, many of these initiatives were designed for a V-shaped recovery. That’s why it’s important this reopening continues and the employment picture improves quickly. ”
Brian Foran, analyst at Autonomous, said the trends were a “hopeful sign” but that it could be a “sugar-high from all this government stimulus, especially for lower-end consumers”. Incomes have been supplemented by one-off $1,200 stimulus payments to poorer Americans, and an extra $600 a week in unemployment pay, which is due to expire at the end of July.
Additional reporting by Robert Armstrong