ANZ CEO Shayne Elliott warns of tipping point as further rate hikes dent borrower finances

Further RBA rate hikes will hit borrowers ‘much harder’, says ANZ boss Shayne Elliott, as many reach a tipping point on swelling repayments.

ANZ CEO Shayne Elliott said while many borrowers remained in ‘remarkably good shape’, that would start to change as further rate rises filtered through to repayments. Picture: NCA NewsWire / Simon Bullard

ANZ chief executive Shayne Elliott says further Reserve Bank rate hikes will hit borrowers “much harder” as many reach a tipping point on swelling repayments, while inflation remains stubbornly high.

His comments come as some borrowers bump up against the 2.5 per cent – or more recently 3 per cent – buffer banks nominally added to their rates when assessing their ability to repay if the cash rate climbed.

Given the nine consecutive rate hikes, with a tenth tipped for this week, it was also time for the prudential regulator to reconsider where loan assessment buffers should sit, Mr Elliott said.

“We think from here on rate rises are going to bite much harder because we are going to be over that buffer that we’ve already built in. Cost-of-living pressures are going to start to bite even more,” he said in an interview with The Australian.

“It’s clearly going to be a lot more stressful (for borrowers) over the next six months than it has been over the last.”

The RBA has overseen a rapid rate hiking cycle to tame price rises through the economy, lifting the cash rate from 0.1 per cent last April to 3.35 per cent in February in nine moves.

Mr Elliott said while many borrowers remained in “remarkably good shape” that would start to change as further rate rises filtered through to repayments.

The bank has seen an increase in loans 30 days past due in the past six weeks, but Mr Elliott said that was partly seasonal, coming after Christmas and the summer holidays.

In the bank’s business and institutional units, ANZ is closely watching customers in the construction and commercial real estate sectors. Mr Elliott believes home loan serviceability buffers should be clipped as rates continue to march higher.

“It (regulator’s buffer level) should be in the context of where rates are in the cycle. Having 3 per cent when rates are at 10 basis points is very different to when rates are at 3 per cent … so you would imagine that as rates go higher the buffer should start to come down,” Mr Elliott said.

He highlighted a risk that if buffer rates stayed at current levels they would “lock more people out” of the mortgage market, including those refinancing and first-home buyers.

“It should be a dynamic number. It should be in the context of the environment,” he said.

On the issue of declining borrowing capacity and the prudential regulator’s settings, Common­wealth Bank CEO Matt Comyn last month said the parameters might need to be reassessed this year.

“As we get towards the top of the rate hiking cycle, we’ve seen a reduction in borrowing capacity. It might be appropriate then to revisit that,” he added. “But we’re not uncomfortable with the settings.”

Mr Comyn said that given inflation levels, he understood the RBA’s rationale for continuing its rate tightening.

But the Australian Prudential Regulation Authority last week said the existing loan assessment settings remained “appropriate in the current risk environment”. It signalled that it would “continue to monitor key risk indicators”, ­including credit growth, asset prices, lending conditions and borrower resilience.

Competitive activity in the mortgage market has also been a feature of 2023 as 800,000 loans prepare to shift from ultra-low fixed rates to markedly higher variable rates. Banks are wooing customers with cashback and other offers to retain and win lending business, as the mortgage market slows.

Mr Elliott agreed with comments from his peers that some lenders were writing home loans at below the cost of capital.

“At the most competitive, absolutely deals are being written a lot below the cost of capital,” he said, noting that sort of pricing was unsustainable over the medium to long term.

“Banks can’t continue to plough capital into something that’s destroying value over the long term. So, no, it’s not logical or sensible.”

Mr Elliott noted the Australian market was following trends in many global markets, where writing home loans was not as lucrative a business for banks. “In most markets home lending kind of washes its face in terms of cost of capital. It’s not certainly a high ROE business,” he said.

“A theory is that Australia has been abnormal for the last 25 years and now we are normalising because of a lot of regulation, higher capital, more competition … we are looking more and more like the rest of the world.”

Last month, Mr Comyn said some banks were writing loans below the cost of capital. “We are participating in a market which is atypical to the one that we’ve seen over just about every period I can think of in the last 20 years.”

Bendigo and Adelaide Bank CEO Marnie Baker said the regional player was prepared to step back from the mortgage market when pricing was “a little crazy”.

The sharper pricing in the home loan market comes as the competition regulator prepares to probe pricing activity in the savings market, as many banks have held back rate hikes from some deposit accounts.

ANZ is hoping more customers flock to its higher rate at-call account under its Plus brand, which has now attracted more than $4bn in deposits.

On ANZ’s takeover of Suncorp’s bank – which is being assessed by the ACCC – Mr Elliott said there was a “legitimate question” about the deal’s impact on agribusiness, where there were fewer bank competitors.

“We don’t think that the acquisition materially really changes or reduces competition,” he added. “In fact, we think it strengthens it because I think we want to keep that business, and with our balance sheet and capability behind it we think it can be even more competitive and grow.

“We’ve got more work to do to bring the broader community, existing customers and the regional Australia community along and explain what does this mean and what are we going to do.”

Originally published as ANZ CEO Shayne Elliott warns of tipping point as further rate hikes dent borrower finances