Gail Kelly on loan arrears

Earlier today, Delusional Economics published a ripping post, Bad bank provisioning, analysing Westpac Chief Executive, Gail Kelly’s, public reassurances that the Australian housing market is robust and that the recent rise in mortgage delinquencies is not a major concern for the economy or the banks’ profits.

Delusional concluded with the following insight into the motivations behind Ms Kelly’s public assurances on loan arrears:

I think one of the reasons for such disclosure [on mortgage delinquencies] is that there hasn’t been a time in the last 20 years where bad debt provisions have been such a substantial driver of return on equity for the banks. In a market of falling rates of credit issuance an increase in bad debt provisions will have a much more visible effect on banking profitability than it otherwise would. The banks next quarter profit reports will certainly be an interesting and enlightening read to get a handle on how big the issue actually is, but given the sensitivity of the issue shown by Ms Kelly I suspect you will be seeing similar messages from all banking chiefs.

Yesterday’s Australian Financial Review (AFR) included an article, entitled Westpac’s Kelly rejects housing fears, providing the following explanation from Ms Kelly on the recent rise in delinquencies:

She said the combination of the record number of mortgages written in 2008 and 2009, and slow credit growth, was responsible for the rise in mortgage delinquencies.

Normally, new lending growth can offset a rise in arrears, which usually peak two to three years after a loan is initiated.

“Usually the new size of the portfolio offsets that somewhat, because with the new lending there are lower delinquencies”, Ms Kelly said.

“But because new lending growth has been lower recently, it magnifies that delinquency pattern”.

This blog has talked a lot about the ponzi-like nature of the Australian housing market, whereby ever-increasing amounts of mortgage credit are required to sustain rising house prices. Now it appears that increasing mortgage credit is also required to prevent mortgage delinquencies from rising!

No doubt the banks and government will be hoping that delinquencies stabilise soon, as experience overseas shows that rising loan arrears typically precedes rising unemployment (see below RBA chart):

It will be interesting to see whether the same relationship between mortgage arrears and unemployment holds for Australia. Only time will tell…

Unconventional Economist
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Comments

  1. Good post, its amazing how much information you can find when reading between the lines. I think its pretty clear that the housing market is running out of steam, the question is what the magnitude of the correct will be in real terms.

    Hopefully those young professionals dont start having kids anytime soon, or get divorced. I think its a bit naive to assume that there isnt a material proportion of even the young professional cohort that will contribute to delinquencies.

  2. Sam Birmingham

    “Now it appears that increasing mortgage credit is also required to prevent mortgage delinquencies from rising!”

    Makes sense when you think about it… Whilst the ponzi continued, delinquencies were masked by stressed out mortgagees selling in an upward market.

    But now they don’t have an equity blanket to rely on, homeowners are forced to keeping battling along – falling further behind on their loan repayments – but unable to sell because (a) there isn’t enough liquidity in the market; and (b) their net proceeds aren’t enough to pay out the mortgage anyway!

  3. Bubblelicious

    These comments absolutely baffle me..

    “Usually the new size of the portfolio offsets that somewhat, because with the new lending there are lower delinquencies”, Ms Kelly said.

    “But because new lending growth has been lower recently, it magnifies that delinquency pattern”.

    So, you mean arrears have nothing to do with the fact that the banks dolled out credit to anyone that asked when interest rates were at historically low emergency levels?

    Even then, the ability to repay under rates 2% higher are designed so mortgagees are in effect on the poverty line.

    I trust I’m not the only one that feels banks are complicit in the mortgage stress being felt by the public and need to take a hard look at themselves before attempting to explain away any financial problems on external factors such as subdued credit growth.

    • Torchwood1979

      2% when rates are at emergency lows was nothing. And I’m sure nobody lent with the assumption that stressed mortgagees could sell into a rising market. I mean, we’re responsible, unlike the US.

      • I worked in the US for a few years and had a 50% deposit, a 130K salary, and yet I was put on a sub-prime loan that was on sold three times while I live there. The guy that brought my house got a 100% mortgage, and I expect a sub-prime loan. The US is different to here, but the prices were a lot lower there for a new 4 bed/2Bath all you can get fittings in a gated community with good schools.

        So I think Aussies are mortgage stressed and I see it all around me in the people I know who are not badly paid. They had the view that houses always go up, and are complicit to some degree, but they did listen to the snake oil salesmen all around them 🙂

        • Bubblelicious

          Not suggesting that borrowers shouldn’t bear a substantial amount of blame here, but we should expect better of our financial institutions and leaders.

          This is clearly an example of moral hazard, where the bankers clearly know the risks but happily turn a blind eye in the pursuit of personal profit.

          • Agree 100%. That is very evident in the JPM ruling yesterday. They caused a lot more than USD 145M in chaos and knew what they were doing from the the highest levels IMO.

            As far as banking goes it’s rare to see justice. The big four here know they had a big part in this bubble (they call it “overexposure – internally”), but also know they’ll be bailed out as the TBTF is the current thinking if anything goes wrong.

          • “This is clearly an example of moral hazard, where the bankers clearly know the risks but happily turn a blind eye in the pursuit of personal profit.”

            It’s more to do with game Theory than Moral Hazard

  4. Torchwood1979

    Arrears are always low in a rising market because anyone who gets into trouble (unemployed, mega medical bill etc) can sell up for at least what they paid, usually more. I know a few people who found themselves in that situation but if they were recent (eg. 2008 onwards) home buyers trying to sell now the bank would be knocking on their door.

  5. “But because new lending growth has been lower recently, it magnifies that delinquency pattern”.
    .
    Wow, that is a straight-forward admission from a bank CEO, of the ponzi-finance nature of their lending (see Minsky’s theory).
    .
    It seems bank CEOs are now longingly looking towards the government and the RBA as to how to let go of the tiger’s tail, when the Minky moment hits their bonus-producing edifices.

  6. michael francis

    I’m sure the Banks will assure us that they are in a robust state right up until the day they collapse.

  7. michael francis

    When do you pull your money out of Westpac?

    Answer. When they ground their rescue choppers.

  8. Guys

    Here’s one from the inside. At least the majority of the major banks do not actually know accurately what their arrears are. The reported arrears are only estimates based on a cashflow analysis which for many reasons could make the estimates very inaccurate.

    • I wondered about that and am thinking perhaps RBA data series B5 – Impaired Assets of Banks might give a clue?
      Anyway, asset write-offs have tripled in last 2 years ($22.9B) compared to the previous 2 years ($7B).
      Lucky banks are good at raising cash to blow on sinking equity values.

  9. Gail the Illogical

    Does the following statement qualify as a description of economic nonsense?:
    “the combination of the record number of mortgages written in 2008 and 2009, and slow credit growth, was responsible for the rise in mortgage delinquencies.”

    What has credit growth got to do with the ability of someone (who just bought an over-priced dogbox) to repay debt they took out based on their income?
    There is no connection that I can see. I might be wrong but at a glance it is non-sensical.
    The statement is inexplicable? Anyone see the logic?

    • Stop gleaming your messing with my Heaven

      Ok this is the way you do it,first you take your hand and put it on your elbow
      (I got it)
      Then you take your knee and put it up there too..(oh wait a minute)
      Then you take your head and put it down between your knee…(I can’t do that)
      And when you feel it ,then flap your ears and float on up here like me..(oh wow)
      And Levitate..(where are you going)
      Then…
      I bet you can do it (yes I can)
      You know you can do it (I think I can do it )
      I bet you can’t do it (maybe you’re right)
      You know you can’t do it (I’m gonna try though babe)
      I bet you can do it (aaww..)
      No,that’s it,you all got it now,Get on
      up off the floor..(I can’t that’s my problem I can’t get up)That’s alright,
      alright now I want you to do something
      …(I’ll do anything)
      I want you to raise your right foot(ok)
      Everybody get up on your right foot..
      (C’mon everybody lets do it)
      Alright ,now raise your left foot (ok)
      No no no no don’t put your right foot back down keep’em both up (I can’t)
      That’s it hehehe

      Taken from ‘DR Hook”Levitate’,and only changed a bit ,cause their pretty good with a patch too..

      cheers JR

    • I assume that higher credit growth makes the same number of delinquencies lower as a percentage.

      It would make no difference to the absolute value.

  10. ‘I think one of the reasons for such disclosure [on mortgage delinquencies] is that there hasn’t been a time in the last 20 years where bad debt provisions have been such a substantial driver of return on equity for the banks.’

    If that is the case – keep increasing the bad debt provisioning until it drives the return on equity to 200%. Easy 🙂

  11. As much as I don’t like bank CEOs and their fat bonuses, I don’t think it calls for racist, xenophobic rants.

  12. I’ve asked for this comment to be deleted, and if you make a similar comment like that again “Small (minded) Australia” you will be banned.

  13. With $805 billion of the $2.8 trillion Australians spent on all real estate since 1999 (the beginning of our bubble) to be written off, I’ve no doubt our ‘Big 4’ shortly won’t be with us in their present form.