Moody’s warns on bank costs, bad loans

A double warning today for Australia’s banks from Moody’s:

Moody’s Investors Service says that the unwinding of the global commodities cycle is heightening the macroeconomic risks faced by Australian banks, as the regions and sectors most exposed to mining are starting to see some signs of stress.

“Although the banks’ direct exposure to the resources sector is relatively low, they face high second-order risks from a potential sharp downturn,” says Ilya Serov, a Moody’s Vice President and Senior Credit Officer.

“These risks are somewhat mitigated by the current low interest rates and the relatively healthy state of Australian corporate balance sheets and, on balance, we expect the banks’ credit costs to increase only moderately from the current low levels,” adds Serov.

…The assessment that risks in Australia’s housing market — which has enjoyed several years of buoyant price growth — are skewed to the downside poses a challenge to the banks, given that residential mortgages dominate their loan books.

And while current low interest rates continue to support housing market stability, deepening affordability shortfalls could lead to an eventual adjustment that would better align house price growth with income growth. And although the likelihood of an outright house price correction remains low, tail risks are rising.

Against this backdrop, Moody’s believes that the Australian Prudential Regulatory Authority’s (APRA) — and the banks’ — moves to ensure that underwriting standards in the mortgage market remain prudent is an important positive.

Moody’s further expects forthcoming discussions by APRA on a domestic version of the total loss-absorbing capacity (TLAC) framework to encompass a broader range of bank resolution issues, potentially including senior creditor bail-in, and the introduction of a ‘junior senior’ class of instruments.

And again:

Moody’s Investors Service says a slowing housing market and rising macroeconomic challenges will lead to an increase in Australian mortgage delinquencies in 2016.

According to Moody’s latest monthly review of the performance of mortgages backing Australian prime residential mortgage-backed securities (RMBS), delinquencies in excess of 30 days rose to 1.20% in November 2015 from 1.14% in October 2015.

While the month-on-month increase in delinquencies in November is typical and reflects increased spending in the run-up to the holiday season, Moody’s expects that mortgage delinquencies will be higher in 2016 than in 2015.

“The housing market has shown signs of cooling over recent months,” says Alena Chen, a Moody’s Assistant Vice President — Analyst.

“Strong housing market activity in both Sydney and Melbourne helped foster relatively strong economic performance in the respective states of New South Wales and Victoria in 2015,” adds Chen. “But a slower pace of house price growth will mean a slowdown in economic activity and will contribute to a deterioration in mortgage performance in 2016 from current exceptionally healthy levels.”

…Moody’s expects the slowdown in the housing market to continue into 2016, particularly in Sydney and Melbourne where prices have increased significantly over the past two years.

“Slowing growth in China, Australia’s biggest export market, and declining commodity prices, which are — at or near multi-year lows — will also put pressure on the Australian economy and contribute to below-trend growth and a soft labour market in 2016,” adds Chen.

And they forgot this:

1

CBA CDS is today at 96.75bps indicating climbing wholesale borrowing costs as you can see in the trend.

The banks are under pressure on a lot of fronts, each one is still manageable alone, but together they are material. And that is before we get to any shock-induced losses.

David Llewellyn-Smith
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Comments

  1. “And while current low interest rates continue to support housing market stability, deepening affordability shortfalls could lead to an eventual adjustment that would better align house price growth with income growth.”

    That’s quite the convoluted sentence…

    • +1 I can assist with a translation.
      “The lowest interest rates in history have delivered the highest house prices we have ever seen”

      • And you out there with a big mortgage, when it blows,…. it will make your balls,…. shrink to the size of raisins.

      • RE is just the object used to generate a financial product which then can be Incorporated into the sausage making mix, think of cattle in an modern abattoir and long distributional effects…

      • @Bubbley – looks like there has been some jousting on the details, noone that I know as I don’t run any wikibots just yet
        https://en.wikipedia.org/w/index.php?title=Australian_property_bubble&action=history

        I guess my only comment is, I was in a cafe just before and was privy to a heated property developer slamming a young couple who were behind on repayments on a dog box apartment. I think we’re at the point where people should need to have a license to be able to borrow – ie pass an IQ test, a logic test and a test on understanding the world!

      • I think we’re at the point where people should need to have a license to be able to borrow – ie pass an IQ test, a logic test and a test on understanding the world!

        This is what the bank is _supposed_ to do. Indeed, it is just about their “you had one job”.

      • Dr Smithy lol +100

        yes, and even funnier when you talk to bankers and they don”t understand how banking works from the actual accounting side. Like being a car mechanic and not knowing that cars run on fuel and oxygen

    • …Moody’s expects the slowdown in the housing market to continue into 2016, particularly in Sydney and Melbourne where prices have increased significantly over the past two years.

      Translation prices in Melbourne and Sydney have bubbled by 50% in just a 2 year period…

    • GunnamattaMEMBER

      Moody’s today on Australian banks and house prices………

      “And while current low interest rates continue to support housing market stability, deepening affordability shortfalls could lead to an eventual adjustment that would better align house price growth with income growth.”

      and your 64 dollar questions are

      1……what is current income growth?

      2…….for how long has Australian RE growth exceeded income growth?

      3………..and what level of house price adjustment will bring Australian real estate to accord with income growth over the period since these last had comparable outcomes?

      4……..does the net house price outperformance over this period represent and improvement or diminution of the competitive position of the Australian labour force?

      5 ……….does the net house price outperformance over this period improve the revenue needs of the Australian Federal budget? (particularly if PpoRs are not taxed, and loss making landlords are promoted through negative gearing?)

      6……….at what point does the government need the revenue or lose an A off the rating (hint: within a year)

  2. Today's Empire Tomorrow's Ashes

    Be afraid: potentially including senior creditor bail-in, and the introduction of a ‘junior senior’ class of instruments.

      • Diogenes the CynicMEMBER

        Bail in legislation has been passed by most Western governments. The banks don’t see deposits as your money it is theirs!

  3. If this blows, the issue I have with holding listed USD etc, is then having to settle to an Auusie cash account at some stage, with the posibility of “risk” within Aussie cash.
    I’m thinking it might be better to fly to Hawai, setting up a USD cash account, then flying back and trasferring. This make any sense to anyone?

    • You can set up an adjunct foreign currency account to a regular account with the CBA. The dollars can be held in your nominated currency ie USD, CAD Pounds etc.

      No fees or interest paid,

    • How much USD you need to hold>?
      Maybe get a job somewhere where they settle with you in USD as well at an agreed amount. makes sense if this keeps going.

    • You cannot open a US bank account without a social security number or with a temp tourist/business/VWP visa. 9/11 and all that.

  4. After US subprime performance who cares what ratings agnecies say. They proved themsleves inept( and untrustworthy if you believe the Big Short).

    • After reading this I get the sense some of Moody’s analysts have recently watched the movie. I’ll be surprised if there aren’t lawsuits resulting from The Big Short. Ratings agencies, investment banks, Greenspan, Paulson, Bernanke………Well worth a look for those contrarians (or otherwise) who haven’t seen it.

    • Didn’t bother watching – however was tempted to drag gf in there to ping her back for the unrelentless junk she makes me sit through.

      Worth my twenty bucks, or should i bang it into a hedge fund that does powerball strategies?

  5. I wonder what the delinquency rate would be if a massive number of mortgage holders didn’t revert to interest only over the last 12 months. Reports of up to 70% of the Big 4 book, up from about 30%!

    • I’ve just gone the other way by refinancing to P&I from IO at 3.99%. I would have stuck with IO for the complete flexibility but it was going to be around 0.35% more expensive. Repayment amount wasn’t relevant given my offset is around 35% of the total mortgage so lower interest rate with principal repayment it is.

      • Suspect that for delinquent types, the difference between paying the extra 0.35% vs principle repayment is enough to make it worthwhile. Did the sums a while back using one of the calculators. On a 500K mortgage it was something like $150 a week in your pocket to revert to IO. The equivalent to about 1% reduction in the cash rate! No wonder everyone’s into it and no wonder new car, retail, airline, accommodation…….sales are still reasonably strong.

  6. Anyone have any thoughts on if it makes sense to fix a mortgage from here? Cash rates wil likely fall, yet if capital becomes tight I assume a fixed term mortgage is likely more secure.

  7. So the CBA would be top of the list of banks to ditch if you have your mortgage through them?

    • I’m no expert but the bank you have a mortgage with isn’t the problem – if they get in strife they will sell your mortgage to someone else and you still own as much of your house as you ever did.

      Your problem is any bank with which you have an unsecured credit, ie your cash in their bank (and that includes the loose cash in your offset account). they can bail that in and you won’t be able to touch it.

      One simple strategy is to put it somewhere else. Another is to use it to pay off another chunk of your mortgage (then you can’t use it as cash obvs but at least you have something to show for it, ie a few more % of house), although this is not for me – if our banks get to the bail-in stage, having some cash around could be quite powerful.

    • “Your problem is any bank with which you have an unsecured credit, ie your cash in their bank (and that includes the loose cash in your offset account). they can bail that in and you won’t be able to touch it.”

      Unless I’m misunderstanding you, you’re claiming that the bank can just take your cash? Even though you’re only below covered bonds in the creditor hierarchy and that both cash and offset accounts are covered by the government guarantee?