NAB says 40pc of borrowers in the Covid era are locked into loans they can’t refinance

Handing down an interim $4.07bn cash profit, NAB chief Ross McEwan said two in five of those who borrowed in the three years to July 2022 could be in trouble.

National Australia Bank has warned that two in five of its customers who bought homes over three years to July 2022 are likely locked into loans they cannot refinance.

And the lender’s chief executive has urged governments to act quickly to address a spiralling housing affordability crisis.

After handing down an interim $4.07bn cash profit that sparked a share sell-off, NAB chief executive Ross McEwan said banks should not take advantage of people who were unable to refinance.

“Banks need to be fair with customers. If they’re not, when the customer gets the opportunity to leave they will,” he told The Australian. “It’s a very short-term approach.”

Analysts had expected NAB’s interim cash profit of almost $4.2bn and dividends at 86c a share, consensus estimates showed.

NAB shares slumped $1.83, or 6.41 per cent, to close at $26.72 on Thursday.

Mr McEwan said the bank was optimistic about the economic outlook and there were “early signs that inflation is moderating”.

But he said “the impact of higher living and interest costs on household spending, and the broader economy is becoming more evident”.

Mr McEwan said the explosion in rental costs was a sign of pain in the economy, as migration figures continue to grow.

He said governments on both state and federal levels needed to “get their heads around it” and make it easier to build homes.

“The issue is getting the plots of land you can get on and build. It’s just taking too long,” he said.

Mr McEwan said the recent turnaround in house price falls showed the huge demand and the need for “more supply, for more building”.

“With immigration starting to happen again – permanent immigration and temporary – there’s going to be continued demand for housing; we need to get the supply sorted out pretty quickly,” he said.

But Mr McEwan said the higher interest rates were causing pain for some homeowners, who were choosing to sell rather than fall behind on repayments.

“At this stage we’ve got to be very careful; the mortgage holders are still able to pay and doing OK and we’re not seeing major stress coming through,” he said.

Mr McEwan said the bank was seeing a small increase in mortgage holders failing to pay on its 30 and 60-day measures, but “major” numbers of distressed customers were not flowing through.

“The crucial thing to watch out for is unemployment,” he said.

NAB said its data showed delinquencies across home lending improved in the period, falling 9 basis points to 0.66 per cent. It noted that there was an increase in business lending arrears in the period.

NAB chief financial officer Gary Lennon said about 40 per cent of those who took out loans between August 2019 through to July 2022 “when assessment rates, interest rates were at their lowest”, would have difficulty meeting higher serviceability requirements of a new loan.

He said even across the broader book, 15 to 20 per cent of NAB’s customers will “find it difficult to move” and meet serviceability tests set by other banks.

The Reserve Bank of Australia has increased the cash rate 11 times in its past 12 meetings since April last year.

NAB warned in its latest set of results almost 1.1 per cent of the borrowers on its loan book owed more than their properties were worth.

Borrowers are currently assessed for a loan at a headline rate three per cent above the product.

The prudential regulator recently confirmed it would hold the three per cent buffer.

Mr McEwan said the top of the interest rate cycle could be a moment when regulators look at relaxing the three per cent ceiling.

“I think over the next probably three, six months, I think the regulator‘s probably have to have a look at it,” he said.

Mr McEwan said NAB was benefiting from higher interest rates and booming business lending, but noted the bank was sitting back from the mortgage price wars as lenders chased borrowers rolling off fixed rate mortgages.

NAB booked a 17 per cent jump in interim cash profits for the six months to March 31, up from the $3.48bn posted last year in a result driven by the gulf between the rates on offer to savers and those charged to borrowers as higher interest rates washed through the system.

NAB’s $3.96bn statutory interim profit lifted on the $3.5bn posted in the second half last year.

But analysts cautioned the bank’s margins on lending may have peaked as red hot competition in the home lending market eroded returns.

Mr McEwan said NAB was taking a “disciplined approach to home lending” with system growth tracking at 0.6x over the first half, but confirmed to The Australian some loans were being written “sub cost to capital” in a bid to maintain relationships with customers.

“It’s not that we’re out of the market, at all, but we’ve said we want to be writing the business at a level of cost of capital,” he said.

NAB subsidiary UBank has been offering cash backs as high as $4000 to some borrowers, but slashed this offer to nothing in recent days.

The banking major reported its net interest margin peaked in December, but still rose 14 basis points to close out the first half at 1.77 per cent.

NAB chief executive Ross McEwan.

Barrenjoey bank analyst Jonathan Mott said the result was “disappointing”, noting the result “does not bode well for the earnings outlook of the banking industry,”.

Atlas Funds Management chief investment officer Hugh Dive said the results showed NAB ceding ground to rivals in the home lending space, warning the bank may face more pain later in the year.

“NAB’s book is shaping up differently, it’s a lot more fixed rate mortgages,” he said.

“It means that whatever pain hasn’t really come through to their customers, when they talk about bad debts and that a lot of these borrowers haven‘t felt it yet.”

Wilson Asset Management’s WAM Leaders lead portfolio manager Matthew Haupt said NAB had “unfortunately been a victim of its own success”.

“It’s been a very loved stock in the banking sector,” Mr Haupt said.

“That’s why you get the quantum of the fall.”

NAB declared an 83c interim dividend.

Originally published as NAB says 40pc of borrowers in the Covid era are locked into loans they can’t refinance