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In its analysis of the big four Australian banks’ 2023 full-year results, Ernst & Young (EY) has found that there has been only a modest increase in mortgage stress among the major banks’ borrowers, with arrears still tracking at low levels.
However, EY Oceania banking and capital markets leader Doug Nixon flagged that the “full impact of rate increases on credit quality is still to play out”.
With cost-of-living pressures mounting, the banks will need to carefully monitor any increase in arrears and defaults over the next year, making full use of their frontline and collections capabilities and stepping up their support for customers facing financial hardship where needed.”
“But the banks have maintained confidence that asset quality will weather the challenging economic environment and, enabled by robust capital ratios, they have continued to provide sound returns for shareholders,” Mr Nixon said.
The analysis further found that economic headwinds and slowing loan momentum “point to increasingly challenging times ahead for the sector” as the banks scour for new sources of revenue despite delivering a strong set of results for the 2023 full year.
Mr Nixon added that much like consumers, Australia’s banks are “facing some tough market conditions ahead”.
“With mortgage profitability continuing to tighten, the banking sector is hunting for growth outside retail lending, in areas such as business lending and looking to optimise funding and operational costs,” Mr Nixon said.
“Tighter financial conditions and serviceability requirements have seen residential mortgage demand slow significantly over the 12 months to September 2023.
“So, while mortgages have long been the traditional Australian banking sector growth engine, the current environment has put business lending firmly back on the banks’ agendas.”
Arrears remain below pre-pandemic levels
Preceding this analysis, findings released in a report commissioned by Perpetual Corporate Trust has found that while 90-plus arrears have lifted over the current interest rate hiking cycle, they still sit at lower levels recorded prior to the COVID-19 pandemic.
The report, Emerging Opportunities: An in-depth assessment of Whole Loan Sales in Australia, found that bank and non-bank 90-plus day arrears increased by 0.17 bps to 0.57 per cent of current balances in 2023 as of 31 August 2023.
However, while arrears have ticked up over the year, they still remain “well below” the 0.69 per cent average prior to the pandemic between 2016 and 2021.
Furthermore, the report found that non-bank 90-plus day arrears increased from 0.31 per cent to 0.76 per cent, while for banks, this figure increased from 0.43 per cent to 0.57 per cent.