Big banks laser-focused on arrear rates

Earlier this month, the four major banks (ANZ, CBA, NAB and Westpac) released trading/financial reporting data, showing growth in their home loan portfolios — particularly given strong support from the broker channel.

The data, covering the six months to March 2023 (except for the Commonwealth Bank of Australia, which was reporting for the three months to March), shows that despite interest rates having risen substantially over the half (with the Reserve Bank of Australia having hitched the official cash rate from 2.60 per cent in October 2022 to 3.60 per cent over the six-month period), the major banks’ mortgage portfolios have been well protected.

ANZ arrears

At ANZ, for example, the 90+ day owner-occupied arrears rate is still down on pre-pandemic levels, with less than 1 per cent of its $293 billion Australian home loan portfolio three months past due.

Approximately 30 per cent of ANZ borrowers are more than two years ahead of their repayment schedule, with a similar proportion on time.

Indeed, of the $4 billion on ANZ’s Australian mortgage books that have a savings buffer under three months, $90 million (2.1 per cent) are one or more payments past due, while just 0.19 per cent ($8 million) are 90+ days past due.

But with 26 per cent of customers now on interest rates higher than their assessed interest rate (due to the rising cash rate environment and increased serviceability buffers) and with the full succession of rate rises having not yet hit the back pockets of many borrowers, there could be tougher times ahead.

ANZ CEO Shayne Elliott commented last week: “The next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand.

“We understand that sustained higher inflation and interest rates create further challenges for some households and businesses across the economy. While the number of ANZ customers in difficulty remains low, we stand ready to help in these potentially challenging times.”

CBA arrears

Similarly, CBA’s mortgage arrears remain below pandemic levels. Home loan arrears remained low, at 0.44 per cent in the three months to March, which the bank said reflected the low level of unemployment and stability in savings buffers.

However, consumer finance arrears increased during the quarter (+14 basis points [bps] to 1.09 per cent for personal loans and +5 bps to 0.51 per cent for credit cards). Even so, these remain low relative to long-run average loss rates.

Like ANZ, CBA CEO Matt Comyn said: “We expect to see further increase in arrears rates as the full effects of interest rate increases are borne by borrowers in the months ahead.”

NAB arrears

Over at National Australia Bank (NAB), the 90+ days past due metric was down, with the ratio of 90+ days past due and gross impaired assets to gross loans and acceptances reducing 9 bps to 0.66 per cent. This is dramatically down on levels previously seen, with 1H21 coming in at 1.23 per cent, for example.

Around 1.22 per cent are 30 days past due, and while this is a slight deterioration on the previous six-month period, it is still down on March 2022 levels.

However, 0.92 per cent are “watch loans”.

Ross McEwan told journalists that while there had been an “ever so small increase” in the 30-day and 60-day buckets (i.e. where people missed the first payment and then a smaller number missed the second), it wasn’t flowing through to the 90-day bucket yet.

“So they are curing,” he said. “Our customers are finding their way back to payment. So we’re not seeing a major problem at this point, but we are on a watchful eye.”

The CEO added that the bank had contacted 7,000 of its mortgage customers that it thought “may have been having a little bit of difficulty” (for example, those who rolled from a fixed rate of around 2 per cent to a fixed rate of more than 5 per cent, or those who are over the 3 per cent buffer from the initial rate they were on), but highlighted that only 13 of those 7,000 borrowers asked for financial assistance.

“I think it’s showing the resilience in the marketplace. It’s showing that [with] full employment [and] unemployment being at 3.5 per cent, it is really helping and that’s the crucial thing to watch out for: the unemployment level.”

He later added: “We are seeing the very smallest of increase in where customers want to sell the house and move on. Very small. It’s still much lower than where it was back in 2019. So, at this stage, we’re concerned for customers; we’re reaching out, but at this stage, they’re very resilient.”

Westpac arrears

Meanwhile, Westpac’s data shows that its Australian mortgage 90+ day delinquency rate was 0.73 per cent in 1H23, with 1.4 per cent 30+ days behind schedule. As with the other majors, 90+ day arrears were higher before the pandemic (0.82 bps in March 2019).

Currently, 0.5 per cent of total mortgage balances are in hardship, mostly due to reduced income.

However, unsecured delinquencies were rising. Around 2.85 per cent of personal loans were 90+ days past due, with credit cards remaining firm at around 0.70 per cent.

Westpac CEO Peter King commented earlier this month: “It’s been one year since the RBA announced the first rate rise of the current tightening cycle. This has been difficult for many customers and more are calling us to discuss their situation. The bank is in a good position to help. At a macro level, our loan portfolios remain healthy. Most mortgage customers are ahead on repayments. Offset balances were little changed and mortgage delinquency levels are low.

Interest rates are now closer to their forecast peak, but we are focused on how long they stay high and what this means for household budgets and discretionary spending.

“We expect to see more stress in the period ahead, particularly in small business. While the Australian economy remains resilient, with low unemployment and high population growth, it is expected to slow over the remainder of 2023.

“Credit growth — both housing and business — will ease. Intense mortgage competition is expected to negatively impact the industry and Westpac’s margins in the next half.

“Westpac enters this environment from a position of strength. We’ve set the balance sheet for a tougher outlook. We continue to run the bank conservatively, with the flexibility to support growth and handle the more challenging conditions.”

Tools to flag potential hardship

Given the focus on future arrears, several lenders are now utilising new tools to help track early warning signs for potential arrears. Experian’s Triggers tool, for example, notifies lenders of changes in consumer spending behvaiour that may indicate that they are in financial stress and could be at risk of defaulting on a payment.

Speaking to Mortgage Business, Experian’s head of innovation, Jordan Harris explained that the Triggers system works by alerting a lender to a potential issue if there is detrimental spending behaviour change.

He outlined that while mortgage payments are often the last payment that people miss (as borrowers triage debt based on size/impact), there are red flags that can appear on a credit file before it happens.

“We know what a consumer who misses a credit card payment, or a payment on another facility with another lender, they are 10 times more likely to go and miss their mortgage payment in the next six months. That’s a really powerful sign of emerging stress,” he told Mortgage Business.

“With Triggers, then lender can then proactively reach out to the consumer to remind them about their options for hardship. That’s one of things we hear really consistently in industry; that early and frequent communication and education is one of the best cures for hardship.

“People are often hesistant to talk to their banks, but the banks have a lot of really good services and capabilities to manage through their hardship. And the sooner they can start that process, the better the outcome is and the quicker they can help them get back on their feet,” he said.

The credit company can also tell lenders when there are changes to a consumer’s spending patterns - for example, if they start utilising Buy Now, Pay Later more than they had in the past, or if they start receiving late direct debit charges in their statements.

“These are all signs that consumers are starting to feel financial pressure and starting to feel the squeeze. By monitoring these behaviours, lenders can compare the base reading of the customer and identify behaviour change that may mean they require help.”

[Related: Mortgage arrears showing cracks: S&P]