Tag: S&P Global Ratings

Mortgage Arrears Get More Severe

The latest data from S&P Global Ratings using their Mortgage Performance Index (SPIN) to March 2018 shows a rise in arrears, and significantly a hike in 90+ defaults.  WA and NT continue their upward trends.

Here is the S&P chart, with the value of securitised mortgages in the pools falling. Overall defaults increased to 1.18% in March from 1.16% in February.

Arrears more than 90 days past due made up around 60% of total arrears in March 2018, up from 34% a decade earlier. This shift partly reflects a change in the reporting of arrears for loans in hardship that came in response to regulatory guidelines. Even accounting for this, however, there has been a persistent rise in this arrears category, though the level of arrears overall remains low.

Arrears movements were mixed nationwide. Home loan delinquencies fell in New South Wales, Queensland, South Australia, and the Australian Capital Territory in March. Of note, mortgage arrears in South Australia appear to have turned a corner; the state’s March 2018 arrears of 1.35% are well down from a peak of 1.81% in January 2017. This reflects a general improvement in economic conditions in South Australia, in line with national trends. Western Australia remained the state with the nation’s highest arrears, sitting at 2.37% in March.

The trends clearly show persistent issues in WA, which chimes with the recent bank disclosures. The question is of course whether we will see defaults rising in other states as lending standards are tightened.

And I recall Wayne Byers recent comment to the effect that at these low interest rates, defaults should be lower!

Crypto Is Just A Side Show

While there may be risks to individual investors, a report from S&P Global Ratings “The Future Of Banking: Cryptocurrencies Will Need Some Rules To Change The Game”, say digital currencies such as Bitcoin do not have much capacity to meaningfully upset the financial services industry at large. This from InvestorDaily.

Despite the buzz surrounding the virtual currency, the report said: “As far as rated financial institutions’ risk exposure is concerned, however, S&P Global Ratings believes that it is much ado about nothing.

“In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.”

And if crypto markets were to collapse, the brunt of the impact would not fall on major banks or its credit ratings but rather on retail investors, given they were the main contributors to activity in this market, with investors in the US, China, Japan and South Korea seemingly most exposed.

“We expect banks rated by S&P Global Ratings to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.”

The contribution of cryptocurrencies to global wealth was also described by the report as “limited”.

“For example, the global stock market capitalization reached approximately $80 trillion at year-end 2017, meaning that cryptocurrencies are still a marginal instrument.

“Therefore, we do not foresee any systemic wealth-effect risk.”

And even if cryptocurrencies were backed by central banks and became an asset class, the effect on firms in the financial system would be “gradual”.

“We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants’ confidence in these instruments,” said S&P Global Ratings Financial Institutions Sector Lead Dr. Mohammed Damak.

Issues of consumer protection and illegal activity would need to be addressed by supranational bodies such as the G20, the report pointed out.

It also discussed the potential of the technology underpinning cryptocurrencies, blockchain, as a “positive disrupter for various financial value-chains”.

“If widely adopted, blockchain could have a meaningful and lasting impact on the celerity, traceability and cost of financial transactions.

“The financial market infrastructure segment might also see medium-term benefit from cryptocurrencies and blockchain through the launch of new income-generating products, such as futures or exchanges based on cryptocurrencies, or the replacement of current practices by new ones based on blockchain,” the report concluded.

S&P Says Mortgage Arrears Lower In Oct 2017

The latest report from S&P Global Ratings covering securised mortgage pools in Australia to end Oct 2017, showed 30 day delinquency fell to 1.04% in October from 1.08% in September. They attribute part of the decline to a rise in outstanding loan balances during the month, and many older loans in the portfolios (which may not be representative of all mortgages, thanks to the selection criteria for securitised pools).

+90 Day defaults are still elevated, see the chart below.

Here is their state summary

Overall trends across the states show the differences across states, with WA and NT still significantly above other states.

The ACT recorded the lowest arrears levels, at 0.58%. QLD and WA, where arrears have been more elevated for some time, recorded another month-on-month decline in mortgage delinquencies. In QLD, arrears fell to 1.39% in October from 1.47% in September. In WA, they declined to 2.12% from 2.21% a month earlier, against a backdrop of increasing loan balances. Home loan arrears also declined in NSW and VIC, but by smaller  magnitudes. In NSW, arrears fell to 0.75% in October–the second lowest in the country–from 0.79% in September. In VIC, arrears declined to 0.94% from 0.96% the previous month.

In terms of the outlook, they say:

“improving employment conditions and low interest rates have helped to keep mortgage arrears low, but risks remain. Australia’s high household indebtedness, which has outpaced income and GDP growth for some time, leaves borrowers vulnerable to a change in economic circumstances. We do not expect arrears to increase much above current levels while these relatively benign economic conditions persist, particularly given the high level of seasoning in the Australian RMBS sector”.

No additional risk from brokers, says S&P

From Australian Broker.

Leading analysts at S&P Global Ratings have commented on the major banks’ use of brokers, saying that trends in third party channels are not indicative of any additional risks for the industry.

These views come from the agency’s analysis of major bank lending practices including governance and controls around brokers, said Sharad Jain, S&P director of financial institutions ratings, at an Asia-Pacific Banking Insights session entitled What’s The Latest Credit Outlook For Australian Banks? held yesterday (29 November).

Despite these views, Jain admitted there may be constraints around making informed commentary in this area.

“We do not see any significant difference in the outcomes [between broker and proprietary] but that data itself is constrained because [it] does not come through any period of significant stress.”

While on the face of it, there may seem to be additional risks through brokers, current data does not back this up, he said.

Nico de Lange, another S&P director of financial institutions ratings speaking at the event, predicted that the broker channel would continue to be a major source of new business for the major banks.

“It will remain a channel that they [will] be focusing on but what might happen is that there might be different strategies within the major banks on the importance that the broker channels might play.”

While some of the major banks had been increasing the use of brokers, others such as the Commonwealth Bank of Australia (CBA) had slightly decreased their use of third party, he said.

RMBS Mortgage Arrears Lower Again, But…

S&P Global Ratings said RMBS Mortgage arrears fell to 1.08% in September across Australian down from 1.10% in August 2017.

They say mortgage arrears rose in both the Northern Territory and the ACT during September but fell elsewhere. While the ACT tops the list with a rise mortgage arrears it is only at a low 0.64%, compared with Western Australia who has the highest arrears of 2.21%.

However, while outstanding loan repayments on 30-to-60-day arrears also declined in most states between January and September, 90-day+ arrears  rose in Western Australia and Queensland. This is the same as we saw recently in the bank reporting season.

S&P said the growth in full-time jobs is positive for mortgage arrears. In addition, the rises rates on in more risky investor loans have minimal impact on RMBS.

This is a myopic view of mortgage portfolios as securitised loans are selected, and seasoned to manage risks. To that extent, it is not necessarily a good indicator of the wider market – including investor loans.

S&P expects arrears to rise over the coming months, as they “traditionally start to increase in November and continue through to March.”

This from Macquarie shows the trends.

 

Genworth Australia Downgraded

From Australian Broker.

One of Australia’s leading providers of lenders mortgage insurance (LMI), Genworth Financial Mortgage Australia, has had its ratings revised from stable to negative.

S&P Global Ratings announced the move yesterday (20 March), 11 days after the company announced the loss of a major customer. The unnamed partner – a second tier bank – opted to terminate the agreement upon the expiry of its contract on 8 April.

“The outlook revision to negative reflects our expectations of a possible weakening of Genworth Australia’s competitive position, and subsequent operating performance, as a consequence of the continued decline in the insurer’s market position,” analysts wrote.

Over the past three years, Genworth has lost two large clients with the most recent loss accounting for around 14% of its gross written premium during the 2016 fiscal year (ending 31 December).

“As a result, we expect Genworth Australia’s full-year 2017 gross written premium to contract further, which is below our previous expectation of modest premium growth.”

This follows a larger than anticipated decline in gross written premium of around 25% during the 2016 fiscal year. While the company remains the largest provider of LMI insurance in the market, these declines have put pressure on its competitiveness, market position and earnings resilience, analysts said.

“We recognise the decline in gross written premium has been partially driven by industry-wide contraction reflecting regulatory measures to curb investor lending growth and reduced lender risk-appetite for high loan-to-value ratio loans.”

The new negative outlook means S&P has a one-in-three chance of further lowering Genworth’s ratings over the next two years. This would occur if there is a material deterioration in the firm’s competitive position or operating performance, or there is evidence of excessive risk taking through inadequate pricing or looser underwriting standards.

S&P could revise the outlook to stable over the next two years if Genworth’s competitive positions stabilises and its operating performance is sound while its underwriting discipline and pricing remains solid.

Australian mortgage arrears up 25%: S&P

From InvestorDaily.

S&P Global Ratings has found prime home loan arrears for the third quarter of 2016 were 25 per cent higher than the same quarter last year, owing to lower wage growth, higher indebtedness and underemployment.

According to the ratings agency, 1.14 per cent of mortgages underlying Australia’s prime residential mortgage-backed securities (RMBS) transactions were more than 30 days in arrears in Q3 2016, compared to the same period in 2015 and 2014.

The ratings agency found that lower wage growth and higher household indebtedness were “undoubtedly contributing to mortgage stress for some borrowers, in addition to declining growth in full-time employment pushing some borrowers into part-time employment” (known as ‘underemployment’).

The mining downturn was also found to be a large contributing factor to the rise, with arrears most evident in Western Australia and Queensland.

For example, arrears fell in all states and territories during Q3 except in WA, where arrears breached the 2 per cent threshold to a national high of 2.03 per cent.

South Australia also had high arrears, at 1.55 per cent, followed by the Northern Territory (1.48 per cent).

Despite this, seven of Australia’s 10 worst-performing postcodes in the third quarter were in Queensland, up from Q2, when five of the state’s postcodes were in the top 10.

This was partly attributed to the “spill-over effect” from the downturn in mining investment in areas with a greater exposure to the resources sector.

While mortgage arrears in Q3 were higher this year, the ratings agency noted that they remain below their peak of 1.69 per cent and decade-long average of 1.25 per cent.

Further, comparing the figures quarter-on-quarter, the agency revealed that the percentage of home loans more than 30 days in arrears had declined from the second quarter of 2016 (when arrears were around 1.19 per cent), as expected.

S&P added that, while unemployment levels are relatively stable and interest rates low, the agency expects that “most of the borrowers whose loans underlie RMBS transactions [would] stay on top of their mortgage repayments”.

“We expect arrears to decline during Q3 before rising again … as Christmas approaches,” it added.

Measuring the weighted-average arrears more than 30 days past due on residential mortgage loans in both publicly and privately rated Australian RMBS transactions, S&P found the total value of loans (including non-capital market issuance) to be $134.28 billion in Q3.

Housing risk a ‘credit negative’ for banks

As reported in InvestorDaily, high residential property prices and private debt levels have driven S&P Global Ratings to revise the credit outlooks for 25 Australian banks to ‘negative’.

short-fuse-pic

The credit ratings agency said that economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months.

“Our base-case scenario remains that the growth in property prices and private sector debt will moderate and remain at relatively low levels in the next two years,” S&P said.

“However, in our alternative case, we assess that there is a one in three chance that the strong growth trend will resume and economic balances will continue to build, which in our view would increase the risks that a sharp correction in property prices could occur.

“In that event, credit losses incurred by all financial institutions operating in Australia would be significantly greater.”

If risks in the economy continue to grow – other things equal – the ratings agency expects to lower its assessment of the stand-alone credit profiles (SACPs) of all financial institutions operating in Australia.

S&P said it is revising its rating outlooks on 25 financial institutions in Australia to negative as it now sees a one in three chance that it would lower these ratings in the next two years. Outlooks on three Australian banks have also been revised from ‘positive’ to ‘developing’ for the same reason.

“The rating actions reflect S&P Global Ratings’ view that the trend in economic risks facing financial institutions operating in Australia has become negative,” S&P said.

The agency pointed to strong growth in private sector debt (to about 139 per cent of GDP in June 2016 from 118 per cent in 2012, or an annual average increase of 5.2 percentage points) coupled with an increase in property prices nationally (average inflation-adjusted increase for the past four years was 5.3 per cent nationally) as the key drivers of a potential increase in “imbalances” in the Australian economy.

“Consequently, we believe the risks of a sharp correction in property prices could increase and if that were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater; with about two-thirds of banks’ lending assets secured by residential home loans,” S&P said.

“The impact of such a scenario on financial institutions would be amplified by the Australian economy’s external weaknesses, in particular its persistent current account deficits and high level of external debt.”

However, S&P’s base case considers that the growth in private sector debt and property prices will moderate and remain relatively low in the next two years.

Increasing apartment supply in Sydney and Melbourne, regulatory pressures on lending practices and capital, and recent trends (including declining sales volumes in the secondary market) should help moderate the growth in property prices and household debt, according to the ratings agency.

“Nevertheless, in our alternative case, we consider that there is a one in three chance that the strong growth trend will resume within the next year, because in our view several other important factors that have supported the past trend are likely to persist,” S&P said.

“[These include] low interest rates, a relatively benign economic outlook, and an imbalance between housing demand and supply; in addition, Australian banks could possibly target higher lending volumes to offset pressures on their earnings growth.”