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Loan arrears rising - Moody's


commercial_property.jpgThe proportion of home-buyers more than 30 days behind on their repayments had reached a three-year high by the end of May.

And it is likely to have gotten worse since.

The causes are economic - and will push mortgage delinquencies even higher.

"We expect that mortgage delinquencies will rise moderately for the rest of 2016," ratings agency Moody's Investors Service said in a report on Wednesday.

In Sydney, where the market is buoyant and jobs are relatively plentiful, only 0.91 per cent of mortgages are 30 days or more behind.

At the other end of the scale in Western Australia that proportion is 2.33 per cent, and 3.63 per cent in the parts of that state outside its capital, Perth.

These are still only small percentages overall but the figures are a reminder that any bank's mortgage book is hostage to the economy's inherently unpredictable fortunes.

And the rising trend in delinquencies is coming as banks continue their perennial battle for market share, with the latest Australian Mortgage Industry Report from JP Morgan finding that, at least until recent weeks, there had been unprecedented levels of discounting on mortgage interest rates.

Banks increased their mortgage rates in 2015 to reflect regulatory changes that increased the cost of capital.

But, according to the JP Morgan report, banks have spent the year "competing on a price-led strategy, discounting to retain market share," and have hit a point where mortgage return on equity levels can't go much lower without having an impact on dividend sustainability.

The Reserve Bank said much the same in its Financial Stability Review last week.

"Most lenders increased their standard variable housing rates by 15-20 basis points in the second half of 2015 after the announcement of higher risk weights on Australian mortgages, although some of this has since been offset by increased discounting for new loans," the RBA said.

If margins are not maintained from here, bank dividends will come under pressure, JP Morgan said.

"Effectively, we may have reached a 'line in the sand' on mortgage profitability."

It's just the latest round in the balancing act banks have to sustain between risk and profits.

And it has the RBA's attention.

"It would be a concern if banks were to attempt to restore their ROE to historical levels by taking on additional risk or by weakening the quality of their risk culture or governance," the central bank said in the Financial Stability Review.

But, as the Moody's report shows, risk is not always deliberately taken on - sometimes it's imposed, even by an economy that by all accounts is doing just fine overall.

"Lower commodity prices and the associated slowdown in mining and mining-related sectors will weigh on profitability, employment and economic growth, and therefore mortgage performance," Moody's said.

"We also expect that underemployment and the slowing pace of home price growth will constrain mortgage performance."

Topics: Loans

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