Housing stress uptick no threat, says NAB

NAB head Andrew Thorburn has expressed confidence of getting through an uptick in housing stress.

National Australia Bank chief executive Andrew Thorburn. Picture: AAP

National Australia Bank chief Andrew Thorburn has expressed confidence of getting through a rise in housing stress, saying any crunch would have to be “fairly extreme” to lead to major losses for the banks.

After NAB last week followed rivals ANZ and Westpac in reporting a rise in the number of troubled mortgages, Mr Thorburn said his confidence in the strength of the $6 trillion housing market was based on sound fundamentals that were unlikely to change, such as low interest rates, an expanding economy and population growth.

“I’m confident on the basis the economy continues to go as we think it will,” he told The Australian. “You will get pockets of stress. We can see in WA and Queensland our housing book and unsecured book starting to deteriorate, but it’s not going to affect the whole and we’re very well secured.

“(But) if we go through a recession or there’s corporate collapses or unemployment goes to 7 or 8 or 9 per cent, that’s a completely different game.”

In NAB’s Australian banking unit, the group’s largest, soured home loans made up the bulk of a 14 per cent lift in bad debt charges. Drilling down further, the $273 billion mortgage book suffered a tripling in bad debt charges to 3 basis points of gross loans while 90-day arrears and impaired facilities ticked higher. While losses remained very low, the trends were being felt broadly.

Despite record low interest rates, Westpac’s mortgages 90 days past due jumped 22 per cent to 55 basis points in the six months to March 31, while ANZ’s ticked up to 70 basis points, also across all states, with particular deterioration in Western Australia and Queensland.

According to NAB’s mortgage “stress test”, the bank would suffer $1.8bn of losses over four years after factoring in lenders’ insurance if the jobless rate peaked at 10.9 per cent.

But Ilya Serov, a senior vice-president at Moody’s, last week told The Australian it was difficult to model because the property market hadn’t been “tested” in the 24 years since the last recession.

He added low rates may be “masking some of the real underlying performance” of mortgages and the next few years would be critical because losses usually occurred two to three years after a property boom.

Mr Thorburn said the bank had a strong buffer due to the decline in the mortgage book’s dynamic loan to valuation ratio to 44 per cent as prices rose and borrowers repaid loans.

In the wake of NAB’s first-half 6.5 per cent rise in cash profit to $3.3bn, several analysts continued to question the bank’s ­provisioning practices and sustainability of dividends.

In a note titled ‘Just when you thought it was safe to enter the water’, referencing NAB’s recent overhaul of its suite of businesses, UBS analyst Jonathan Mott said the bad debt charge of $375 million, or just 14 basis points of loans, appeared too good to be true given it was the lowest of the big four. He said it appeared NAB failed to impair its alleged $250m exposure to troubled law firm Slater & Gordon.

Morgans analyst Azib Khan said the confusion would become clear in the second half when “either NAB will recognise this exposure as impaired in or Westpac will write it back”.

NAB also didn’t add specific provisions for $522m of new impaired loans to New Zealand dairy farmers.

Morgan Stanley analysts said while the outlook for NAB’s margins had improved, growth prospects remained modest and loan losses were “unsustainably low”, forecasting a 14 per cent cut to dividends next year.