Australian banks are unlikely to face a significant increase
Mortgage asset quality remains resilient in banks, Ratings analysts said during a July 26 Australian property spotlight webinar. Nonperforming housing loans as a percentage of gross loans ticked upward in March from December 2022, but were still low compared to pre-COVID levels.
"The ultimate risk to the bank for mortgages is through the level of credit losses that show up in the income statement. We forecast credit losses [to] remain at about 15 basis points of customer loans," said Sharad Jain, director for financial institutions at S&P Global Ratings. "In short, we expect the banking system will weather the stresses from rising interest rates very well."
The Reserve Bank of Australia has increased interest rates since May 2022 in an effort to rein in inflation. It held its benchmark cash rate unchanged at 4.10% in July, but warned that further tightening might be required. The rising rates have led to concerns of a fixed-rate mortgage cliff — when high repayments hit borrowers as they come to the end of the locked-in rate period — and its impact on homeowners. Many borrowers secured fixed-rates loan to buy property when the RBA cut the cash rate to as low as 0.10% in November 2020 amid the COVID-19 pandemic. With fixed-rate loans typically lasting between one and five years, the higher interest rates will translate to higher repayments as new loan terms are negotiated.
About 800,000 households will feel the impact of fixed-rate loans rolling off in 2023, Marion Kohler, head of the RBA's economic analysis department, said at a parliamentary committee meeting in February. Kohler estimates that it equates to about A$350 billion in credit rolling off from fixed to variable interest rates in 2023, 9News reported.
"There is no question that some borrowers will struggle to service their mortgages due to rising interest rates," Ratings' Jain said during the webinar. "We believe this cohort of borrowers is, and will remain, very small at the overall system level as well as the individual bank level. What that means for us is that most borrowers should be able to absorb the higher interest rate burden," Jain said.
ANZ Group Holdings Ltd. and National Australia Bank Ltd. said they were seeing only a slight increase in borrower stress in their mortgage books. NAB CEO Ross McEwan told a parliamentary hearing July 12 that the bank saw an uptick in customers not being able to make a payment but that the "levels that we're seeing are still below the 10-year average," Reuters reported.
ANZ CEO Shayne Elliott said borrowers coming off low fixed-rate mortgages were "prepared for it."
Banks have said they will redirect capital and investment to their business lending segment as stiff competition in mortgage lending would offset any gains from their margins due to rising interest rates.
Nonperforming loans remained well below pre-pandemic levels, at 0.72% of total residential mortgage credit outstanding as of March, according to the Australian Prudential Regulation Authority's quarterly property exposures data released June 6.
"The modest rise in the March quarter followed seven consecutive quarters of declines in the NPL ratio," the regulator said.