This article is from the Australian Property Journal archive
AUSTRALIA’S four major banks could withstand an isolated significant housing market downturn, according to a Fitch Ratings’ stress test, which examined an Ireland-esque collapse with house price declines of 20%-60% and default rates of 10%-20%.
However Fitch said the banks’ ratings could come under pressure in severe scenarios where the banks also suffer from large second-order economic effects, including a fall in consumer spending and higher losses from banks’ business loan portfolios.
The Australian residential mortgage market is large, equating to more than 90% of GDP at end-2017. Total outstanding mortgages underwritten by authorised deposit-taking institutions were AUD1.6 trillion, with the four major banks combined accounting for AUD1.3 trillion. Mortgage growth has outpaced household income growth since 2011, resulting in rising household leverage. However, house-price growth has been even faster, such that the ratio of housing debt to housing assets has fallen to 26% from a peak of 30% in 2012.
A downturn would result in losses of $24 billion for the banks, although mortgage insurance would stem losses to $19 billion.
Fitch examined the capital impact of a point-in-time stress across a range of scenarios, with house-price declines of 20%-60% and default rates of 10%-20%. The Irish housing market collapse that began in 2007 was used as a reference point; this which involved house-price declines of 43% and a peak default rate of 13%.
Senior director Tim Roche said, “Even the moderate scenarios in our stress test are severe relative to Australia’s most recent recession in the late-1980s and early-1990s, when default rates peaked at 3%.
“The tests showed that the banks’ ratings would be resilient to the moderate scenarios, reflecting adequate capital buffers and strong profitability,”
“The severe scenarios would involve a negative shift in Fitch’s view of the operating environment for Australian banks, as well as our assessment of asset quality, capitalisation, profitability and, potentially, funding. These factors combined would be more likely to lead to downgrades,” he warned.
According to Fitch, the Commonwealth and Westpac would experience the largest losses, reflecting their higher exposure to Australian mortgages. However, the proportionally larger commercial exposures of ANZ and NAB would render them vulnerable in a broader stress event.
Fitch said another potential area of stress is the large proportion of borrowers with an interest-only mortgage.
Westpac has the largest exposure to interest-only mortgages (46% of Australian mortgages at financial year-end 2017 (FYE17, to September 2017), followed by CBA (33% at end-2017), ANZ (31% at FYE17) and NAB (30% at FYE17). The Reserve Bank of Australia (RBA) estimates that about 30%, or AUD480 billion, of outstanding mortgages will convert from interest-only to amortising repayments by 2021, and notes that the step-up in repayments can be as much as 40%.
“Some borrowers are likely to face financial stress over this period, particularly in light of the tightened regulatory requirements and underwriting standards being implemented by the banks, which has led to a substantial reduction in new interest-only loans being offered,” Fitch warned.
The stress test was undertaken as risks within the household sector have continued to grow; and Australian banks, including the four majors, have large exposures to residential mortgages.
“Our central scenario is not a sharp or substantial correction in Australia’s housing market, and we believe the outlook for economic growth and unemployment is relatively benign.
“House-price growth should moderate further through 2018, as banks continue to tighten underwriting standards for mortgages; interest-only loans convert to amortising repayments; and additional housing supply comes on to the market.
“A rapid rise in the unemployment rate remains the most likely driver of a significant housing market correction, although sharply higher interest rates would also pressure some borrowers – given the high household debt.” Roche said.
Australian Property Journal
