Mortgage tests show resilience for Australia's major banks
Ratings for major banks should remain resilient in a housing slowdown unless mortgage defaults come up to 5% and house prices plummet by over 30%, according to the latest stress tests by Fitch Ratings.
Australian households are currently “highly leveraged,” said the credit rating agency, with debt-to-income ratio at a record 143.7% in March and a large portion of mortgages on variable interest rates.
Considering these factors, a sudden surge in rates would leave borrowers vulnerable.
“National house prices fell in May 2022 amid expectations of further interest-rate hikes in 2022 and 2023,” said the Fitch report. “Nonetheless, our base-case assumption is that continued economic growth and low unemployment will cushion housing-market stress. Banks also have substantial buffers and lenders’ mortgage insurance that should limit losses.”
Mortgages are the largest single-sector lending category of Australia’s four largest banks, added Fitch, with CBA having the greatest exposure to defaults and ANZ the lowest. However, all banks should be able to withstand a moderate downturn where default rates peak “well below” 2%.
“Our stress tests show that CBA suffers the largest losses of the banks across all scenarios, but ANZ suffers the second-largest for lower price-decline scenarios, partly because it has the highest proportion of mortgages in the 80%+ loan-to-value buckets,” said the report.
The scenarios in Fitch’s mortgage stress test involved house prices falling by up to 60% and default rates increasing by up to 20%.
“Downgrade sensitivities are likely to be triggered for most, if not all, four banks in the more severe scenarios, potentially involving multiple-notch VR downgrades,” said Fitch. “However, downgrades to the banks’ Long-Term Issuer Default Ratings (all currently A+/Stable) would be limited to one notch unless the Government Support Ratings (all currently at ‘a’) were also downgraded.”
