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BFCSA: ANZ flags 'stubbornly low' wages as mortgage stress climbs

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ANZ flags 'stubbornly low' wages as mortgage stress climbs

Australian Financial Review May 1, 2019 10.51am

James Eyers, Sarah Turner


ANZ Banking Group chief executive Shayne Elliott is concerned about a spike in customers struggling to repay their mortgages, warning "stubbornly low” wage growth in a weakening housing market could prompt more defaults.

ANZ said on Wednesday that 5 per cent of its home loans are in negative equity as at March, non-performing loans have ticked up and mortgages more than 30 days due had risen sharply.

The bank told analysts during a briefing the spike in short-term bad debts reflected borrowers taking longer to work out their financial situation as housing prices fell.

“The market will be nervous about the sharp deterioration in mortgage arrears in our view,” said UBS analyst Jonathan Mott.

The rise in mortgages more than 30 days overdue to around 2.25 per cent as at March, from 1.8 per cent in September, "is much more than a seasonal uptick [and] appears to be coming from NSW, VIC and WA," said Mr Mott.

ANZ met expectations against a difficult operating environment, announcing a 2 per cent increase in cash profit. It held the dividend at 80¢, fully franked, supporting ANZ share price, which was trading 2.8 per cent higher on Tuesday morning at $27.97.

But analysts are honing in on indications of mortgage stress, with CFO Michelle Jablko telling them on the call: "We have seen customers taking longer to come out of delinquency, which makes sense as the property market has slowed, and more customers going into hardship, particularly in NSW although off a very low base. This is an area we are managing closely."

Overall, asset quality at the bank remained strong with total provision charges down 4 per cent to $393 million and group loss rate down $890 million. New impaired assets also fell, down 8 per cent to $890 million compared to the same time last year.

Ms Jablko said of new customers going into arrears this half, 12 per cent were in negative equity and these customers were mostly in Western Australia and Queensland. She added new home loan vintages performing better than older loans, reflecting tightening of lending standards.

Nevertheless, as wage growth becomes a core focus in the federal election campaign, Mr Elliott said ANZ is “a little bit worried about families out there doing it a little bit tough." [Oh dear, somebody get that poor crocodile a tissue. –RJB]

After a long period of low credit losses, which has supported bank profits, Mr Elliott said the impact of low wages was starting to appear in ANZ’s data.

The impact of low wages is starting to appear in ANZ’s data

He pointed to “500 or 600 families in this half get themselves into difficulty in terms of not being able to keep up with their mortgage payments”.

While the number is very low compared to its 1 million customers, it is “a lot higher than we’ve seen in the past, so the question for us is; is this a trend? Is it just a bit of a blip?”

“Wage growth is stubbornly low,” Mr Elliott said in an interview published on the bank’s BlueNotes website.

While wages growth has picked up a bit to a modest 2.3 per cent, it has failed to flow through to higher inflation. Weak inflation data printed last week has heightened the chance of a sudden interest rate cut from the Reserve Bank of Australia in May.

Mr Elliott's commentary around wages "it's almost a political statement in some respects," said Romano Sala Tenna at Katana Asset Management. "It's a little bit surprising."

The slide pack accompanying ANZ’s first half results showed gross impaired assets ticking up in the Australia division, and the number of home loans customers more than 90 days overdue with their mortgage repayments also higher towards 1.2 per cent. Customers missing repayments was worst in Western Australia, at 2.5 per cent of loans.

In terms of home loans in negative equity, a slide shows that based on a 'dynamic' loan to value ratio (which reflects marked to market valuations and is the LVR watched by the market), 5 per cent of the portfolio is in negative equity - due to falling house prices - although ANZ said 15 per cent of these customers would have had equity if offset balances sitting in their savings accounts were included in the figures. However, the 5 per cent number excludes loans in default.

There was a notable skew to the mining states of Western Australia, Queensland and the Northern Territory, which account for 57 per cent of negative equity mortgages.

Overall provision charges in the Australian division remain low, at $396 million, but this was up from $312 million at the previous corresponding half. This came despite volume and fee income from loans being lower.

“More Australians are finding it a little bit tough,” Mr Elliott said, adding the economic landscape made it difficult for banks.

“We’re in the middle of an election cycle and we’re hearing a lot about cost of living, wage growth etcetera. Well those things manifest themselves in our own business and we can see it, so we’ve got to get momentum right, helping people get into their homes and helping them start and run their businesses. That is a big task.”

Other fund managers noted that ANZ's comments about low wage growth and higher numbers of customers struggling with mortgage payments chime with comments from other companies.

"One of the key themes in the last few days is that economic conditions are soft," said ST Wong at Prime Value Asset Management.

"The economy is not booming, there are some signs of softness," he said. In his view, current conditions warrant whatever assistance can be provided, whether that's on a fiscal level or monetary policy level.

ANZ's comments on wage growth and mortgage stress were made as the country heads to a general election in a couple of weeks and with the Reserve Bank of Australia due to hold its next interest rate meeting next week.

"I think that the Reserve Bank of Australia will have to cut interest rates sooner rather than later if they want to stay ahead of the curve," said Greg Bundy at Federation Asset Management.



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