Housing downturn will not shake Australian banks

Mortgage portfolios will remain intact amidst adequate capital buffers.

The mortgage portfolio of Australia’s largest banks could weather a significant housing market downturn without experiencing losses, according to credit rating agency Fitch.

The stable financial footing of the country’s lenders can weather the stress test conditions of house price declines ranging from 20-60% and default rates of 10-20%. “The tests showed that the banks' ratings would be resilient to the moderate scenarios, reflecting adequate capital buffers and strong profitability,” the credit rating agency noted.

Also read: APAC banks grapple with growing property risks

CBA and Westpac stand to be the most affected due to their higher exposure to Australian mortgages but the proportionally larger exposures of ANZ and NAB also render them vulnerable to a broader stress event.

A rapid rise in unemployment rate remains the most likely driver of a housing market correction although steeper interest rates could also pressure borrowers in light of high household debt levels.

However, things are not heading off towards a correction any time soon which is credit-positive for banks. “House-price growth should moderate further through 2018, as banks continue to tighten underwriting standards for mortgages; interest-only loans convert to amortising repayments; and additional housing supply comes on to the market.”

Nevertheless, a probe by regulator Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry could be the undoing of Australian banks in the near term as the inquiry has revealed a long history of corporate wrongdoing and unethical practices.