The Central Bank of Ireland has published two Financial Stability Notes (FSN). Both of the FSNs show that COVID-19 payment breaks provided valuable cash flow relief to households and businesses across Ireland in the wake of the pandemic.
The first FSN, written by Edward Gaffney and Darren Greaney, entitled “COVID-19 payment breaks on residential mortgages”, describes the characteristics of Irish owner-occupier mortgages at the five major retail banks that were on COVID-19 payment breaks at the end of May 2020. The second FSN, entitled “Which firms took COVID-19 payment breaks?”, written by David Duignan and Niall McGeever, examines which Irish firms took COVID-19 payment breaks.
Gaffney and Greaney’s research notes that by 29 May 2020, over 67,000 COVID-19 payment breaks applied to owner-occupier mortgages in Ireland at the five major retail banks, covering one-in-nine mortgages worth over €10bn in loan balances. By August 2020, almost half of payment breaks on residential mortgages had ended with a return to full payments.
The FSN finds that current or previous payment difficulties are the strongest available predictors of COVID-19 payment breaks at retail banks. By value, 21% of lending with current forbearance, and 18% of lending with a history of forbearance, had a payment break. Only 9% of loans with no history of forbearance had a payment break. By origination date, payment breaks were most common among loans originated during the peak of residential mortgage credit in the mid-2000s. In total, 53% of all payment breaks were on mortgages originated between 2004 and 2008. Loans issued since 2010 are the least likely to have a payment break, with loans issued since the introduction of the mortgage measures in 2015 less likely than the average mortgage.
In addition, the FSN finds that those who borrowed higher multiples of their annual income (loan to income ratio) were more likely to have a payment break. The payment break share almost doubles between loan to income (LTI) shares of 2 and 4.5.
In the second FSN, Duignan and McGeever’s research shows that borrower sector is the strongest predictor of payment break uptake by Irish firms. Sectors with a high share of employees either on wage subsidies or temporarily laid-off had the highest payment break rates. The highest payment break rates were in the Accommodation & Food, Arts, Entertainment & Recreation, and Other Services sectors. 47% of Accommodation & Food balances had a payment break, rising to 59% when looking at SME balances in isolation. In addition, 45% of Arts, Entertainment & Recreation SME balances had a payment break.
The FSN goes on to say that performing loans (those not classified as a Non-Performing Loan/NPL) with weaker pre-COVID credit quality were moderately more likely to have a payment break. Loans that were performing in December 2019 and with a record of being NPL at some point in the past are also more likely to have a payment break than performing loans with no NPL record. However, the vast majority of payment break loans did not show explicit signs of vulnerability prior to the pandemic.
When considering the product types used by all firms, the FSN takes into account payment break rates by product type with leasing (25.6%), term loans (21.7%), and hire purchase (21.5%) products having a large share of outstanding balances. These three products make up the overwhelming majority, 95%, of payment break balances.
The FSN shows that 65% of SME payment break balances are secured. Of the €3.3bn that are secured, commercial real estate is by far the most common collateral asset. 52% of Large Corporate payment break balances are also secured, with commercial real estate being the main asset.