Westpac’s mortgage stress rises in Western Australia

Westpac has suffered a sharp spike in mortgage stress in WA as the mining slump dents customers’ incomes.

Westpac CEO Brian Hartzer and chief financial officer Peter King in Sydney yesterday.

Westpac has suffered a sharp spike in mortgage stress in Western Australia as the slump in mining activity dents customers’ incomes, signalling growing pressure for the banking industry from declining asset quality.

While Westpac’s overall lending book held strong, the nation’s second-biggest mortgage lender yesterday revealed that 90-day mortgage arrears in Western Australia had rocketed to about 130 basis points — more than double a year ago.

The rise in WA, which makes up 10 per cent of Westpac’s $370 billion mortgage book, increased the group’s 90-day delinquencies by 21 basis points to 0.66 per cent. It coincided with a sharp jump in stressed assets in the $NZ5.9 billion ($5.6bn) dairy book following a review of the impact of lower milk prices, resulting in “a number” of farmers being downgraded by Westpac to the “watchlist or substandard” category.

The percentage of the NZ dairy portfolio graded as “stressed” surged to 25 per cent from 4.74 per cent a year ago.

While some of the mortgage stress in WA relates to a change in how Westpac measures customers in hardship arrangements, chief executive Brian Hartzer said the flow-on impact from the collapse in the mining investment boom had forced the bank to step back from the state.

“We began winding back our exposure in WA a while ago ­because of concerns about what was happening in the mining sector, so although those percentages look relatively high they’re pretty small in the scheme of things in our book,” he said.

“And if you look at housing overall, I think we have something like 260 homes in possession across the whole country. That’s a very small number, and overall we think the book is in pretty good shape.”

Chief financial officer Peter King added that the WA portfolio was well secured and some loans had mortgage insurance, reducing the likelihood of the stress becoming a “big issue”.

“But obviously we’ve got to work pretty hard with customers who are finding it difficult so that’s probably where more of our focus is going,” he said.

CBA is most exposed to the WA economy and reports first-quarter results today.

As Westpac had previously flagged, the overall impairment charge slid 31 per cent to $457 million in the second half, or just 14 basis points of gross loans. Actual mortgage losses were just 2 basis points.

Declining asset quality has been a key feature of the major banks’ results in recent weeks as the cycle turned from historically low charges helped by the lowest interest rates on record and rising asset prices.

In total, the big four’s bad debt charge increased $1.4bn, or 39 per cent, to $5.1bn in full-year 2016, the highest level since 2012, according to PricewaterhouseCoopers. It contributed to a 2.5 per cent slide in the big four’s cash profits to $29.6bn, the first decline since the global financial crisis.

“While it appears for now that these losses are isolated to sectors and regions impacted by low commodity prices and the decline in the mining and resources sector, there are signs that bad debt expense may have been as good as it gets,” said PwC Australia’s banking leader, Colin Heath.

The banks also suffered from higher “single name” institutional loans turning bad, such as Dick Smith, Arrium, Slater & Gordon and Peabody Coal.

Other profit challenges included lower net interest margins of 2.02 per cent and a 194-basis-point slump in return on equity to 13.8 per cent, according to KPMG.

While trying to offset the soft revenue environment by cutting costs, higher regulatory compliance and technology spending lifted the banks’ cost-to-income ratios to 44.1 per cent.

“Looking ahead, it is inevitable that the majors will continue to ­refine their business models, being much more selective on which markets, products and customer segments to serve and those they may seek to pursue with a different approach — or exit altogether,” said Ian Pollari, KPMG’s national head of banking.