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Large Australian banks face growing mortgage risk as more buyers borrow more than 95% of their property’s value as some supportive government policies endure, although analysts say they don’t. there is no reason to be alarmed yet.
In the three months ended December 2020, residential mortgages with a loan-to-value ratio of at least 95% increased 27.4% from the previous year, although this segment remained the smallest part of the sector’s mortgage portfolio, according to the Australian Prudential Regulation. Authority. The year-over-year increase was much higher than the 15.4% growth for mortgages with an LTV ratio of 60% to 80%, as well as the 9.7% growth for mortgage loans with an LTV ratio of less than 60%, according to the regulator’s quarterly report on banking statistics published on March 16.
“Mortgage stress is still a potential risk for banks given their high exposure to this segment, but it does not appear to be an imminent risk,” Omkar Joshi, principal and portfolio manager at Opal Capital Management, told S&P Global Market Intelligence in an email.
“Obviously, we have yet to see how the economy progresses. Lending standards have generally been quite good across the industry. Banks are also well stocked for any potential problems,” he said.
Homebuyers rushed into the market, with new residential mortgages rising 20.2% to A $ 128.1 billion in the December 2020 quarter from a year earlier, according to the ‘APRA. A historically low key interest rate, the Government’s JobKeeper wage subsidy program as well as a home loan guarantee policy for eligible first-time buyers with a minimum deposit of 5% of the property’s value would have encouraged home purchases. , according to analysts.
When the supports relax
Roy Morgan’s research shows that when JobKeeper ends on March 28, around 20% of mortgage borrowers in November 2020 could be “at risk.”
Ending the wage subsidy program could result in the loss of 150,000 jobs, Australian Treasury Secretary Steven Kennedy said in a statement to Parliament on March 24. However, Kennedy added that part of the impact could be mitigated by the recovery in the labor market, which saw the unemployment rate fall to 5.8% in February after a recent spike of 7.5% during the pandemic.
“Households are under pressure from mortgage stress, stable income and rising costs,” said Martin North, founding director and banking industry analyst at Australia-based Digital Finance Analytics. North added that lending standards could deteriorate despite the country’s lending laws still in place as Australia considered relaxing its responsible lending rules for banks.
Grant Halverson, CEO of McLean Roche, a retail banking and payments consultancy, added: “NPLs are very low and show no signs of rising – by June it will be clearer how this issue will follow. – at the moment this is only an opinion and guess work. “
“There is no evidence of lower lending standards or of banks and other lenders chasing market share – if that happens, it will emerge later this year,” said Halverson.
APRA said in the quarterly report that “overall, the quality of residential mortgage assets may deteriorate over the next few quarters as deferrals expire and government stimulus changes, however, some of these impacts could be offset by continued improvement in the economy and low interest rates. “
The regulator added that the majority of outstanding residential mortgages remain well covered by guarantees despite increasing loans with higher LTV ratios. The asset quality of home loans is also stable, with the ratio of non-performing residential mortgages falling to 1% in December 2020, after 1.1% in September of that year, the regulator said.
Mortgage rush
While the risk is not alarming at the moment, Australian mortgage-focused banks are enjoying improved bottom lines amid the housing boom.
The Commonwealth Bank of Australia, the country’s largest bank by assets, announced “above the system” growth in its mortgage business for the first fiscal half-year ended December 31, 2020. The bank said in February that its approvals for home loans reached 179,000, up 32% from 136,000 in the previous year period. CBA said it has a 25.2% share of the Australian mortgage market, compared to its next rival Westpac Banking Corp. with a market share of 21.6%.
“The strength of the housing market is positive for bank profits and it does not appear that banks have lowered their lending standards and increased their risk profiles,” Joshi said.
Australian banks are benefiting from a booming housing market “because their profits are still largely driven by the growth of the mortgage portfolio, and if loan volumes increase sharply, they will benefit,” North added.
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