Big Banks Laser-Focused On Arrear Rates

  1. Although delinquency rates are still lower than pre-pandemic levels, the CEOs of the four major banks have expressed concern that arrears may increase in the coming months. Recently, ANZ, CBA, NAB, and Westpac released financial data indicating growth in their home loan portfolios, largely due to strong support from the broker channel. The data, which covers the six months ending March 2023 (except for Commonwealth Bank of Australia, which reported for the three months ending March), reveals that despite a significant increase in interest rates over the period, with the Reserve Bank of Australia raising the official cash rate from 2.60% in October 2022 to 3.60% over six months, the major banks’ mortgage portfolios have remained robust. To read the full article, you must create a free account or sign in if you already have one.

ANZ arrears

ANZ’s owner-occupied arrears rate is still down on pre-pandemic levels, with less than 1% of its $293 billion Australian home loan portfolio three months past due. About 30% of ANZ borrowers are more than two years ahead of their repayment schedule, with a similar proportion on time. Out of $4 billion on ANZ’s Australian mortgage books that have a savings buffer under three months, 2.1% ($90 million) are one or more payments past due, while only 0.19% ($8 million) are 90+ days past due. However, with 26% of customers now on interest rates higher than their assessed interest rate, there could be tougher times ahead. ANZ CEO Shayne Elliott commented last week that the next six months will be more difficult than the last, and competition in retail banking is as intense as it has ever been in Australia and New Zealand. ANZ stands ready to help in these potentially challenging times, as sustained higher inflation and interest rates create further challenges for some households and businesses across the economy.

CBA arrears

In a similar manner to ANZ, CBA has reported that its mortgage arrears are still lower than the levels seen during the pandemic. The bank’s home loan arrears remained at a low rate of 0.44% in the first quarter of the year, which is attributed to the stable savings buffers and low unemployment rates. However, there was an increase in consumer finance arrears during the same period, with personal loans rising by 14 basis points to 1.09% and credit cards increasing by 5 basis points to 0.51%. Despite this, these rates are still lower than the long-term average loss rates. CBA CEO Matt Comyn has also predicted that there will be a further increase in arrears rates as borrowers begin to feel the full impact of interest rate hikes in the coming months.

NAB arrears

National Australia Bank (NAB) has reported a decrease in its 90+ days past due metric, with the ratio dropping from 1.23% in 1H21 to 0.66% currently. Although there has been a slight increase in loans that are 30 and 60 days past due, CEO Ross McEwan stated that customers are finding their way back to payment and there is no major problem at this point. NAB has reached out to 7,000 mortgage customers who may be experiencing difficulty, but only 13 have requested financial assistance, demonstrating the resilience of the market. McEwan emphasized the importance of monitoring unemployment levels as a crucial factor in assessing the situation. While there has been a small increase in customers wanting to sell their homes and move on, it is still much lower than in 2019 and customers remain resilient.

Westpac arrears

During the first half of 2023, Westpac’s Australian mortgage 90+ day delinquency rate was 0.73%, while 1.4% of mortgages were 30+ days behind schedule. However, these figures were higher before the pandemic. At present, only 0.5% of total mortgage balances are in hardship due to reduced income. Nevertheless, unsecured delinquencies are on the rise, with 2.85% of personal loans being 90+ days past due, while credit cards remain stable at around 0.70%. Westpac CEO Peter King has acknowledged that the past year has been challenging for many customers, and more are seeking assistance from the bank. Despite this, the bank’s loan portfolios remain healthy, with most mortgage customers ahead on repayments and low mortgage delinquency levels. However, King expects to see more stress in the future, particularly in small business, as the Australian economy is expected to slow over the remainder of 2023. Credit growth is also expected to ease, and mortgage competition is likely to negatively impact Westpac’s margins in the next half. Nonetheless, Westpac is well-positioned to handle these challenges, having prepared its balance sheet for a tougher outlook and continuing to run the bank conservatively while remaining flexible enough to support growth.

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Tools to flag potential hardship

To address future arrears, many lenders are now using novel tools to detect early warning signs of potential defaults. One such tool is Experian’s Triggers, which alerts lenders if there is any change in consumer spending behaviour that may indicate financial stress and the possibility of defaulting on a payment. Jordan Harris, Experian’s head of innovation, explained that the Triggers system works by notifying a lender of a potential issue if there is any detrimental change in spending behaviour. Although mortgage payments are typically the last payment missed by borrowers, there are warning signs that can appear on a credit file before it happens. Harris noted that if a consumer misses a credit card payment or another facility with another lender, they are ten times more likely to miss their mortgage payment within six months. With Triggers, lenders can proactively reach out to consumers to remind them of their options for hardship. Early and frequent communication and education are some of the best cures for hardship, according to Harris. Lenders can also be informed by the credit company of changes in a consumer’s spending patterns, such as an increase in Buy Now, Pay Later usage or late direct debit charges in their statements, which may indicate financial pressure. By monitoring these behaviours, lenders can compare the customer’s baseline reading and identify behaviour changes that may require assistance.

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