It begins

It was only a matter of time. UBS let the warning out to investors this morning.

Arrears rose alarmingly. Early warning sign for consumers?

ANZ’s arrears levels have risen sharply. Since September its >30 days arrears have risen 41% to $5.8b, while >90 days are up 26% to $2b.
We believe higher arrears are heavily skewed to mortgages, primarily the 2008 vintage First Home Owners across Australia (not just QLD).
Although at ~65bp 90 day mortgage arrears are still low, this sharp rise is an ominous lead indicator for the domestic economy.

The Australian has picked up the story with some extra information on Westpac:

ANZ and Westpac’s rise in mortgage arrears highlights an “alarming” problem lurking in the broader economy, say analysts.

As Westpac today reported a 7 per cent rise in its closely watched cash profit to $3.17billion, analysts at UBS said ANZ’s sharp rise in arrears — or overdue debt — was an “ominous lead indicator for the domestic economy”.

The warning came as Peter Esho, chief market analyst at Cityindex, said a similar rise in arrears in Westpac’s results today “suggests mortgage stress is rising”, particularly in recent months.

ANZ reported yesterday a sharp rise in arrears since September, with more than 30 days arrears rising 41 per cent to $5.8bn, while more than 90 days jumped 26 per cent to $2bn, with the majority related to its Australian mortgage business.

UBS analyst Jonathan Mott, who today cut ANZ to neutral, said the arrears are heavily related to first home owners across the country who piled into housing on the back of the government’s incentive scheme post the global financial crisis.

“This sharp rise is an ominous lead indicator for the domestic economy,” said Mott, adding the rise was the most surprising element within ANZ’s first-half result.

Mott’s concern lies in the fact that given the sharpest rise is in the 30-59 day and 60-89 day buckets, ANZ will experience material increases in past 90-day due loans during its second half.

He also pointed out while natural diasters played a part in the rise in arrears, the mortgage problems in Queensland begun before the floods and cyclones and the deterioration is also occurring in other states.

The Reserve Bank raised rates by 25 basis points seven times from October 2009 to November 2011, which along with larger raises from the banks and rising inflation on household essentials has put borrowers under pressure.

AMP chief economist Shane Oliver said the RBA “did the right thing” leaving interest rates on hold yesterday at 4.75 per cent, but acknowledged the central bank could raise rates further around August.

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  1. We had something akin to your graphic in Auckland, yesterday arvo! And this morning we got the statistical equivalent, “The trend for residential building consents hit its lowest level since the series began in 1982, Statistics New Zealand said today’. And as we know, an economy like ours, that’s heavily property dependent, is about to hit more turbulence.

  2. “higher arrears are heavily skewed to mortgages, primarily the 2008 vintage First Home Owners across Australia (not just QLD)”

    Hello, Australia’s very own RUDDPRIME mortgage crisis !!

    • Howard + Rudd + Gillard + any other goct that comes into power. They seem to think high housing prices are good for the economy…..just like their American counterparts…..

  3. The 41% and 26% are from page 100 of

    (2509+1309+1955)/(1669+878+1555) = 1.41
    and 1955/1555 = 1.26.

    What I would like to see (but haven’t found a way to calculate) is an update of the chart from the Broyhill Asset Management presentation: the deteriorating coverage ratio at Australian banks.

    “Reserve growth not keeping pace with non-current loans today”.

    The coverage ratio is an “early warning” sign that can’t be hidden.

  4. WBCs 90+ days mortgage delinquencies have been slowly trending up since December 2009 (about 0.3% to 0.5%). The same measure for credit cards is a bit lumpier, but the trend is the same. I can’t vouch for ANZ, but the WBC figures don’t look that bad. The trend isn’t good, but there’s no big jump that I can see.

  5. Now that I’ve looked (admittedly quickly), I am finding it hard to locate the numbers showing a big increase in ANZ 90+ day arrears.

    Anyone know where UBS is getting there numbers from?

      • Whoa! There it is. The Regional Banking arrears look even more dreadful – a full 0.5% increase (pg 96). And it makes up 29% of the Australian commerical lending book. Nasty.

        Thanks Deep T.

        • RE; Regional – AGRI. Any exporters (especially that compete directly with US) would be hit hard by the high AUD. I’d heard that pre USD weakness that the US was loss leading to gain market share (ie: after mad cow, etc). Now the currency does it for them. Perhaps this is showing in Agri arrears

  6. It’s interesting to see how different housing markets get in sync. There have been similar reports coming out of Canada and China.

  7. Deep T,

    Once all the banks announce all there results and if we see a massive increase arrears obviously this is a sign things are getting bad but what else would you want to look at. What other examples does WesPac and ANZ results show signs of trouble ahead?

    • 1. I’d like to see a full disclosure and analysis of the borrowers in the “Borrower Assist” program and how these are reflected in delinquencies across the the 4 majors?

      2. At least a breakdown of resi mortgages by LVR band at time of making the loan and age.

      Under Pillar 3 disclosure requirements, the banks must provide this info but I won’t hold my breath

          • Deep T,

            I am guessing once you have everything you ll be writing a article about this. Be keen to hear your thoughts on all the results of the banks.


      • What’s the “Borrower Assist” program? Google is no help. Is this something from the ANZ or Westpac corporate reports?

        I do recall hearing on the radio (late last year IIRC) about a government program (QLD State I think) for people having trouble keeping up with the mortgage. It promised payment holidays of up to 6 months.

  8. When is the change to the Government guarantee on deposits due to be reviewed again….??? August?

    I just hope my significant savings will be ok.

      • I wrote to my local member when the introduction of covered bonds was being debated asking for assurance that the FCS (financial claims scheme) would be continued if such a move would be introduced. I have received a copy of a letter from Wayne Swan to my local member which states;

        “Further, the Australian Government announced on 12 December 2010 as part of its Competitive and Sustainable Banking package that the FCS would become a permanent feature of Australia’s banking landscape.”

        Not sure if this Competitive and Sustainable Banking package has passed into legislation yet.

        • But how is this possible? Theyre permanently going to guarantee all deposits in all banks? So effectively the gov’t becomes the bank? This just sounds crazy – though lately I’ve heard a lot of that out of politics…

  9. “Since September its >30 days arrears have risen 41% to $5.8b, while >90 days are up 26% to $2b.”

    “We believe higher arrears are heavily skewed to mortgages, primarily the 2008 vintage First Home Owners across Australia (not just QLD).”

    Who woulda thunk it(*rolleyes*).

    The post picture fits the data.

  10. Chris Carter

    Wonder how NAB will fare, would expect them to do slightly better than Westpac and CBA since they did not grow their mortgage books as much.

    Mind you any one of the big 4 falling would send the entire system tumbling down.

  11. if pulling all of my money out of the back wasn’t so impractical / unsafe I would have already done it. sitting in cash away from this mess seems prudent to me.

    how fast will this ship turn?

  12. Cool to be a bear

    Let’s hang on a bit here people

    Yes there was a jump in 90 day arrears, but management noted that 75% of exposures were mortgages, were well secured and it was also noted that group Individual Provision loss rates have been lower, such that the higher delinquencies are not expected to flow through to provisioning. Straight from the analyst call yesterday.

    So before all of you you start predicting the end of the world, things have to be put in perspective. All these buzz words “alarming” “early warning” and “trouble ahead” is great if you’re a doom merchant shorting the banks, but the real truth is actually quite boring.

    • “before all of you you start predicting the end of the world”

      not predicting……..just hoping 🙂

    • Well, we will see.

      According to the UBS report there are over $6Billion worth of mortgages in arrears in the 6-29 days basket.

      So we have to wait 3 months. However I can’t think of how a family that has already missed a home loan payment is going to suddenly come up with the next two. I don’t see any relief from inflation, utilities and/or interest rates coming, and I have already talked about Dunn & Bradstreet and Glenworth’s assessment of the problems.

      If these arrears make it to 90 days we are looking at around $12 Billion in 90+ arrears on a mortgage loan book of approx $207 B. That is close to 6%. I will leave it to others to estimate what that means in terms of equity/loan ratios, but Deep T has already filled us in on this.

      If this continues then come late 2011 we will be in full blown crisis.

      • $2b in 90+ days arrears means that more than 5k families missed 3 or more repayments

        $6b in 30 days arrears is means that more than 15k families missed one repayment

        This is just on ANZ book

        What about other banks?

        are we already close to 100k families not able to service mortgages

    • Hey, Cool,

      You say “…75% of exposures were mortgages, were well secured…”

      Secured by what? Why, residential property presumably. So, let’s take this to the nth degree.

      A large proportion of those mortgages default – the mortgages are secured by the mortgaged property. So what does the bank end up with? Lots of residential properties – which it has to sell in order to get its money (or part thereof) back.
      But hang on – the probable reason that the mortgagors defaulted in the first place would be some sort of adverse economic development that created financial stress in the housing market, wouldn’t it? And the bank is now going to try and sell all these repossessed properties into this market?
      Gee, this sounds like something very familiar.
      These mortgages are “well secured”? Perhaps only if you consider residential property to be legal tender.

  13. I’d love to say the economic glass is half full, but it looks like it has sprung a leak…

  14. My eyes are on the budget now – 10 May, here we come. Wayne Swan already said it will be a very unpopular budget this year. Not sure what kind of fury will be unleashed on families that are already stretched to the max.

  15. FrankieFourFingers

    I don’t believe any of the bank stats on arrears or foreclosures. NAB had over 200 foreclosures compared to CBA’s 5. On the surface it would appear that NAB have a riskier loan-book than CBA but dig a little deeper and you will see that CBA allow customer who are in arrears to continually draw against their (paper profit) equity.

    It is only when house prices fall and customers get into a negative equity scenario that CBA will see their foreclosure rate accelerate.

    • I am very interested in this point mate…can CBA mortgage holders withdraw equity indefintely…surely the CBA has an interest in only allowing this tactic for special circumstances, because if prices keep falling it makes sense for bank to stop this ponzi process and sell up ASAP.

      Any info on this issue from other bloggers would be greatly appreciated.

  16. Stewart, I’m short a couple of them, but only lightweight positions at the moment. I’m considering medium term positions as these fundamentals decline further.

    I’m considering writing a special Trading Day report on the banks, given that it is much easier for retail investors to do so now, with the cost of put options (where you profit on the underlying share price falling) going down in price by a factor of 10 (1000 share lots reduced to 100 share lots), in line with the US option market.

    Again, more info is required on mortgage arrears, servicing costs, household debt stress etc, so its time to keep a close eye on these reports as they come to hand.

    • Love to see it. I understand how put options work, just not how the market works. It all seems very illiquid to me. When ever I look there is no trading in long dated puts at all.

    • I use CFDs myself. No end date. I have largish short positions on the ASX200. (Large for me anyway).

      Can’t wait for the next 3 months!

  17. I believe if it increases even more over the next quarter then it will be ok “Houston we got a problem”. I think the picture for this article says it all. The storm is coming but what kind of storm is it. I got to think its a fairly bad one but it might just be some heavy rains for a few months or couple of years.

    • Is it the Beginning of the End ,or an End of the Beginning ..
      Stay Tuned at MB…or run rough
      cheers JR

  18. Its not possible to back all bank deposits, its a myth is the gov going to print money? Hmm will do wonders for the AUD hyperinflation here e come.