Highly indebted borrowers peak concern for Westpac in super competitive market

Westpac boss Peter King says the bank is closely watching its highly-indebted borrowers as the banking system responds to uncertainty.

Westpac chief executive Peter King. Picture: Nicki Connolly

Westpac chief executive Peter King says the bank is concerned about borrowers who took on massive mortgages in the pandemic, revealing it was sitting on about 200 homes after owners defaulted on payments.

Mr King said the bank had repossessed the same number of homes as it had at the height of the global financial crisis but noted the level of mortgage arrears was still low.

Many borrowers who took loans out at the depths of the pandemic have seen interest rates climb in 10 consecutive hikes by the Reserve Bank of Australia.

The cash rate is up from its low of 0.1 per cent in April 2022 to 3.6 per cent in March this year.

“Interest rates are a blunt tool, what we’re looking at in our portfolio is who might need help,” Mr King said. “The part of the portfolio we’re watching very closely are high debt to income – that’s people who borrowed to their maximum debt capacities.”

Speaking at a business event in Sydney, Mr King said Westpac had assessed many of its current fixed rate borrowers as though they would be required to pay higher variable rates when it wrote those loans.

HSBC chief executive Antony Shaw said parts of the economy faces stress.

“Ultimately higher rates are going to put certain stresses on part of the economy,” he said.

“I think it will be prudent for many central banks at this time to err on caution.”

Mr King said Westpac was well positioned coming into a looming market downturn after reshaping its bank book over recent years to slash exposure to commercial lending and higher risk investor and interest only borrowing.

Westpac had cut its exposure to lending on commercial buildings from almost 16 per cent after the bank acquired troubled rival St George in 2008, to just 6 per cent of its total lending book, he said. “From the perspective of us it’s going to feel strange to say this but things are working pretty well domestically for us,” he said.

But Mr King said the mortgage market was “the most competitive market that I’ve seen in my career” as banks competed to pick up borrowers rolling off cheap pandemic-era loans.

He said Westpac was not looking to compete with rivals who might be writing loans below the cost of capital. “We’re playing in the market but we’re not growing above the market,” he said.

“From a credit perspective it’s a good time to write business. You’ve got big buffers, property prices have come down.”

Bendigo and Adelaide Bank business banking general manager Jim Sarris said the intense competition in lending was also flowing through business lending.

“I’m definitely seeing it every day in the commercial market, I’m seeing pricing right on or well below capital the cost of capital

“The tension’s there, I just don't think it’s sustainable.”

Mr King said Australia’s banking landscape was moving towards one of scale, predicting several smaller operators will exit the system in the coming decade.

“If you think about the cost of investment in digital technology to compete for the customer, cyber to protect your data and your customer, AML CTF banking regulation, running the bank, you need scale,” he said.

“We may have less small players in the industry but that’s a consequence of what the industry is being asked to do.”

Suncorp signalled cost of capital as a key impediment for its bank as part of its justification for its sale in submissions to the Australian Competition and Consumer Commission.

Bendigo and Adelaide Bank similarly noted the need to lower cost of capital as part of an argument for why the Suncorp sale to ANZ should be blocked.

Commonwealth Bank boss Matt Comyn said Australian banks were facing an up-ended wholesale financing landscape in the wake of the collapse of Silicon Valley Bank and Credit Suisse alongside ructions at several other US lenders.

But Mr Comyn said Australian banks benefited from the country’s strong lending landscape, with high deposit funding leaving plenty of headroom for banks to pad out balance sheets with further wholesale funding.

“The Australian banking system is a credit to the policy frameworks as well. An extremely strong position, I would say, uniquely, globally,” he said.

Mr Comyn revealed he had spoken with Treasurer Jim Chalmers on Tuesday morning, as part of efforts by the government to take the temperature of financial figures.

Separately on Tuesday, Dr Chalmers revealed he had been in conversation with US Treasury secretary Janet Yellen and European Central Bank president Christine Lagarde over volatility in global financial systems and the impact of higher interest rates.

Dr Chalmers said the conversations with international authorities showed they were “prepared to do what’s necessary to reassure markets at a time of uncertainty and volatility”.

“Co-ordinated action by central banks and international financial authorities has helped ease some of the concerns in global funding markets, but they remain vigilant,” he said.

“There’s no doubt the volatility in the financial system is contributing to uncertainty more generally in the global economic outlook.”

Dr Chalmers is set to convene a meeting of the Council of Financial Regulators on Thursday, as part of ongoing monitoring of the banking system.

The CFR sees senior figures within APRA, the RBA, Treasury, and the Australian Securities and Investments Commission come together to monitor risks and co-ordinate responses to issues in the financial system.

“We’re not immune to what’s coming at us from overseas, but our own economy and financial system are well-regulated, well-capitalised and well placed to respond to these challenges,” Dr Chalmers said.

“I’ve been closely engaging with our regulators who advise our own institutions are in a good position to withstand the pressures coming at us from around the world.”