Bad loans inch up in Australian banks as mortgage arrears rise

There was an uptick in mortgage loans overdue for more than 90 days.

Australia’s four major banks posted slight increase to their problem loan ratios, according to credit rating agency Moody’s, which comes as prices in the country’s heated property market lost steam after dropping from 4.2 % in December to 0.2% in April.

A small increase in residential mortgage loans overdue for more than 90 days offset an across-the-board decline in impaired residential mortgage loans and improving corporate loan quality.

“The growth in mortgage arrears suggests tail risks in the housing market remain, despite the Australian Prudential Regulatory Authority's measures to rein in riskier types of housing lending including investor loans, and moderating housing prices in the key states of New South Wales and Victoria,” Moody’s noted.

Housing credit accounts for 60% of the banking system’s overall credit, which has raised some concern about the liquidity conditions of banks as the downturn has already manifested in weaker credit growth which fell from a 6.6% peak in April 2016 to 5.1% YoY in March, according to BMI Research. 

Aggregate funding costs, however, remained favourable by historical comparison even amidst a slight increase in short-term wholesale funding costs.

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Credit costs also remained contained thanks to favourable economic conditions and low interest rate environment.

"The banks' liquidity continued to strengthen slightly over these six months, and their wholesale funding requirement was reduced relative to prior periods on slower loan growth," said Tanya Tang, analyst at Moody's.

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The major banks are also well positioned to meet higher capital requirements as two of the four major banks have already met the new regulatory minimum CET1 requirement of 10.5% that will take effect in January 2020.

"Their unsecured debt continued to be well received by investors and their funding costs remained low by historical comparison, although short-term rates rose in response to a widening of US money market rates," added Tang.