Delinquencies underlying Australia’s prime residential mortgage-backed securities increased in January, with regional banks bearing the brunt of the increase.
According to the latest statistics from Standard & Poor’s (S&P), over 30-day arrears underlying Australia’s prime residential mortgage-backed securities (RMBS) portfolio increased by 7 basis points over the month ending 31 January 2019, rising from 1.38 per cent to 1.45 per cent.
The rise was driven by a 13bps increase in investor mortgage arrears, which rose from 1.27 per cent in December 2018 to 1.40 per cent in January, while owner-occupied home loan delinquencies increased from 1.60 per cent to 1.69 per cent over the same period.
On a state-by-state basis, the sharpest rise in arrears was in the Northern Territory (38bps), followed by Western Australia (21bps), South Australia (18bps), the ACT (15bps), Victoria (12bps), Queensland (8bps) and NSW (7bps).
Tasmania was the only state to report a fall in delinquencies, which fell by 2 basis points.
Arrears remain highest in the Northern Territory (3.16 per cent), followed by Western Australia (2.94 per cent), Queensland (1.81 per cent), South Australia (1.68 per cent), Victoria (1.34 per cent), NSW (1.20 per cent), the ACT (1.18 per cent) and Tasmania (1.10 per cent).
Reflecting on the national rise in mortgage arrears, S&P noted that in seasonal terms, the spike was “typical”, adding that the size of the increase was slighter than in previous years.
“January is typically the peak of the arrears cycle, reflecting the after-effects of Christmas and summer holiday spending,” S&P observed.
“The magnitude of the increase at this point in the arrears cycle is lower than in previous years.”
The S&P data also reported that over 30-day arrears were higher on mortgages originated by regional banks (2.68 per cent), compared to those originated by major banks (1.73 per cent), which the ratings agency attributed to regional banks’ increased exposure to borrowers in resource states.
“The higher levels of mortgage arrears in regional bank portfolios reflect their exposure to Queensland, Western Australia and South Australia. These states have experienced more elevated arrears for a number of years,” S&P stated.
S&P added: “The total loans outstanding in the regional banks’ residential mortgage-backed securities sector has declined about 34 per cent in the past five years.
“Loans in the more advanced stages of arrears have increased to 1.42 per cent from 0.62 per cent during this period.
“Refinancing conditions are likely to remain tough for loans in Queensland, Western Australia and South Australia, particularly in regional areas.”
The ratings agency expects arrears in such portfolios to remain elevated “for some time”.
Overall, S&P expects refinancing pressures to persist amid tighter credit conditions and reduce borrowers’ capacity to ease their repayment burden, adding that high household indebtedness would also increase borrower sensitivity to changing economic conditions and interest rate movements.
“This vulnerability is greater for borrowers with weaker credit attributes, such as those with high loan-to-value ratio loans,” the ratings agency added.
S&P concluded: “Exposure to loans with higher credit risk is not material in most RMBS portfolios and is unlikely to put any significant pressure on arrears in the short to medium term while employment conditions remain stable.”