Signs of lending stress rising as banks reveal results
The Australian May 5, 2016 12:00am
Michael Bennet
Even before the Reserve Bank’s rate cut to record lows, Westpac chief Brian Hartzer this week labelled the mortgage market “fundamentally sound”.
Yet under the surface, stress in Westpac’s and ANZ’s loan books increased over the past six months, and National Australia Bank’s results today will be scrutinised for signs of the same trend.
While the RBA dropping rates to 1.75 per cent will alleviate some of the stress on borrowers falling behind on their loans, they are only back where they were before the banks’ out-of-cycle hikes late last year. The lure of even cheaper debt may inspire new consumers to leverage up, given poor returns elsewhere.
“In a country that hasn’t had a recession in 24 years, we haven’t really been tested,” said Ilya Serov, a senior vice-president at Moody’s, of the difficulties assessing the housing market’s fragility at a delicate time for the economy.
Mr Serov, who expects the banks’ overall asset quality to deteriorate, said he would be closely watching the performance of mortgages in the next few years, given that losses usually occur two to three years after being originated and there had just been a property boom, particularly in Sydney and Melbourne.
“Should we see that those vintages of originations are in fact weaker in quality, that is yet to come through,” he said, adding the 2013 and 2014 loans were the ones to watch because the regulator forced the banks to tighten lending standards last year.
After the RBA’s rate cut extended its easing cycle to four and a half years, Mr Serov said the next crop of loans would also be in focus. According to RBA data, housing credit growth picked up in the months following the previous cut 12 months ago.
“Given interest rates have just gone down again, that will obviously support performance, so we may not see a sharp rise in mortgage arrears. We’re certainly not expecting that in an environment of declining interest rates,” Mr Serov said. “(But) the interest rate environment is masking some of the real underlying performance, in a sense.”
Even with record low interest rates, Westpac’s mortgages 90 days past due jumped 22 per cent to 55 basis points in the six months to March 31. ANZ’s ticked up to 70 basis points, also across all states, with particular deterioration in the heavily exposed mining states of Western Australia and Queensland.
After the banks had previously flagged problem loans to large companies such as Arrium, Slater & Gordon, Peabody Coal and McAleese, investors were betting on a spike in bad debts.
By market capitalisation, the big four banks on Tuesday were among the top six shorted stocks on the stockmarket, led by CBA with $2.4bn of cash betting against it. Led by soured institutional lending, ANZ’s bad debt charge surged 80 per cent to $918m over the year.
While the hedge funds that short the banks have long got the trade wrong, with the housing market strong, the period ahead will prove whether they or the banks are right.
“These are low levels of stress,” said Mr Hartzer. He said a policy change to the reporting of delinquencies for customers granted hardship assistance drove a large chunk of its delinquencies, and Westpac’s actual realised mortgage losses for the half were just $35 million.
Since the RBA began cutting rates in late 2011, bank mortgage debt has grown 45 per cent to $1.44 trillion, according to the banking regulator. During the boom, the value of mortgages approved each quarter ratcheted up from $62bn to almost $100bn by the final three months of last year and was until recently about 45 per cent investors.
During the same period, total provisions held by the banks to cover losses more than halved to the lowest since September 2008 as impaired and past-due loans slid.
But the run-down of provisions has left the banks with two options: take the hit to earnings and top them up or risk keeping them low and hope the credit cycle remains relatively benign.
“Intuitively, you would think a cut by the RBA does reduce stress if it is passed on to the borrowers, but this would generally take time to flow through into our arrears numbers,” said Narelle Coneybeare, an analyst at Standard & Poor’s.
“But there are other factors in whether people are paying their mortgage on time or not, particularly unemployment.”
While the RBA said that firmer lending standards and abating house price pressures had provided room to cut rates, the bank also noted patchy jobs data.
S&P is predicting arrears to “modestly increase” in the coming months after a rise in February for the fourth month in a row following consumers’ usual Christmas spending splurge.
One positive, Mr Serov said, was that the regulators’ had made banks ensure new borrowers could pay their mortgages if interest rates rose to 7 per cent.
Brian Johnson, a banking analyst at CLSA, agreed, noting that while some investors would believe the RBA’s rate cut was “great for housing”, the cap on how much banks could lend customers based on higher serviceability could limit a fresh lending frenzy.
Omkar Josh from Watermark Funds Management said Westpac’s past due loans had risen for the first time since 2010.