Will ASX bank shares be dragged down by mortgage pain?

It’s no secret that ASX bank shares like Commonwealth Bank of Australia (ASX: CBA) have had a tough year in 2020. Between dividend cuts, share price slumps and ongoing pains on the Australian economy, bank shares have born much of the brunt of the coronavirus pandemic that has crippled economies around the world.

Banks are highly leveraged in the economy, as individuals and businesses tend to only utilise debt and credit when the economy is in good shape. It isn’t too hard to see why the share prices of the big four ASX banks have been struggling ever since the pandemic arrived on our shores.

The share prices of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) all remain approximately half of what they were worth at the beginning of February. While CBA has performed a little better. It is still sitting at $67.12 at the time of writing, a long way from the company’s 52-week high of $91.05.

So where to from here? Some investors might think the worst is behind the ASX banks. By extension, they might even view the historically-low share prices we see today as a buying opportunity.

Are the ASX banks out of the woods?

Well, reporting from Business Insider may make those investors think twice today. In this reporting, Business Insider quotes figures released from the Australian Banking Association (ABA) today. Those figures reveal that 450,000 banking customers are set to receive a call in the next few weeks regarding deferred loan payments. The figures tell us that around 900,000 Australians currently have debts under ice right now, worth $274 billion. That equates to 1 in 9 mortgages and 1 in 6 small business loans across the country.

Much of this $274 billion pile of debt is scheduled to be un-frozen at the end of this month. And that could be a problem for the ASX banks.

There are a number of options for these borrowers available, including transitioning to interest-only loans or deferring until January 2021. Even so, it doesn’t mask the fact that lenders are facing a real precipice over the next few months. The reporting tells us that by the end of July, Australians had only recommenced repayments of around 13% of the $274 billion of frozen debt. And that’s after economic reopening across much of the country, and continued government stimulus.

Over the next few months, national unemployment is forecasted to rise over the remainder of the year. Meanwhile, government assistance payments like JobKeeper and the coronavirus supplement are scheduled to taper off over the next 6 months or so.

Foolish takeaway

If borrowers are forced to eventually default on their loan obligations, it is bad news for the ASX banks. And we might see this come to a head over the next 6-12 months. Myself? I wouldn’t want to be buying ASX bank shares going into that headwind, even if they do look historically cheap today. Uncertainty is not a companion you want on your investing journey, in my view.

More reading

• 2 ASX dividend shares to buy instead of CBA
• Leading brokers name 3 ASX shares to buy today
• ASX 200 up 0.5%: CSL signs COVID-19 vaccine agreements, big four banks charge higher
• Share price opportunities to buy this week
• ASX 200 Weekly Wrap: Friday crash pulls ASX back below 6,000 points

Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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