Australian Large Banks - Mortgage Losses Manageable in Realistic...

Australian Large Banks - Mortgage Losses Manageable in Realistic Scenarios
Mon 03 Jul, 2023 - 6:31 PM ET

The results of Fitch Ratings’ 2023 stress test of the Australian mortgage portfolios of the country’s four largest banks reinforces the resilience of these portfolios to more realistic stresses. Nevertheless, losses have increased for most scenarios, reflecting the impact of the sharp house price correction in 2022. Losses before lenders' mortgage insurance (LMI) recoveries from the mortgage portfolios remain below 0.3pp of risk-weighted assets (RWAs), or 10% of annualised pre-impairment operating profit, at a 5% default rate and 30% house-price decline. We still expect large losses to emerge from other parts of the loan portfolios before manifesting in the mortgage books, and therefore expect Viability Ratings (VRs) to be downgraded if some of the more severe scenarios covered in this report were to occur. House Price Correction The 2023 mortgage stress test comes after one of the sharpest corrections in Australian house prices on record, driven by a large rise in interest rates. Mortgage asset quality has weakened little so far, with the rate rises yet to fully flow through to many borrowers. Unemployment, which we expect to be a key driver of any rise in mortgage arrears, remains low. We forecast this to weaken modestly in 2023 and 2024.