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Our sub-prime underbelly (Read 781 times)
bogarde73
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Our sub-prime underbelly
May 22nd, 2017 at 10:13am
 
High-risk mortgage loans to young families, professionals and other over-extended borrowers amounting to more than six times household incomes could wipe out 20 per cent of the major banks' equity base, institutional investment fund JCP Investment Partners has warned.

The fund manager's study warns that official estimates of average household indebtedness are depressed by the sizeable number of mortgages that are effectively full paid off.

In a proprietary study of the nation's record high-and-growing household debt mountain, the Melbourne-based fund said Irish-style housing losses for the bigger-than-recognised pool of riskier borrowers could wipe out half of the banks' equity capital.

Interest-only loans, said JCP – which is one of three Australian equities managers appointed by the Future Fund – could be "Australia's sub-prime".


...



As regulators crack down on interest-only lending and the Turnbull government's decision to introduce a bank levy drives up the cost of loans, "only time will tell if such households can afford the mortgages they have".

The dramatic warning echoes concerns raised by Reserve Bank of Australia governor Philip Lowe this month that rising household debt had made the economy more vulnerable, and that it was unclear how stretched consumers might behave in a crisis.

It also follows a review by Australian Prudential Regulation Authority chairman Wayne Byres of bank capital requirements for housing exposures, given the "notable concentration in housing", announced at The Australian Financial Review Banking and Wealth Summit last month.

:AFR

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bogarde73
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Re: Our sub-prime underbelly
Reply #1 - May 22nd, 2017 at 1:47pm
 
Credit ratings agency S&P Global Ratings has lowered the ratings of 23 Australian financial institutions including AMP, Bank of Queensland and Bendigo and Adelaide Bank, citing the rising risk of a sharp correction in property prices.

In a statement released late on Monday morning the credit ratings agency said that imbalances identified in the Australian economy continued to build up and that banks and lenders in Australia faced a significant rise in credit losses if such an event were to occur leading to the downgrades.

"To reflect the increased risk, we have lowered our assessment of the stand-alone credit profiles (SACPs) of almost all financial institutions operating in Australia."

AMP has been cut from A+ with a negative outlook to A with a stable outlook, BOQ has been cut from A- with a negative outlook to BBB+ with a stable outlook and Bendigo and Adelaide Bank has also been cut from A- with a negative outlook to BBB+ with a stable outlook.
 
Shares in BOQ and Bendigo & Adelaide Bank fell on the news against a broader uptrend in the banking sector. BOQ shares fell 7c or 0.6 per cent to $11.63 and as shares in Bendigo & Adelaide Bank fell 6c or 0.5 per cent to $11.79. AMP bucked the trend and rose 3.5c or 0.7 per cent to $5.11.

 
S&P Global Ratings said that growing imbalances fuelled by a rapid rise in private sector debt and house prices in Melbourne and Sydney had increased the prospect of a sharp correction in property prices and that if this were to occur "all financial institutions operating in Australia are likely to incur significantly greater credit losses than present".
"With residential home loans securing about two-thirds of banks' lending assets, the impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its persistent current account deficits and high level of external debt.Despite this warning, S&P Global Ratings said the outlook for Australian banks as a whole was relatively benign compared to international peers. The global credit ratings specialist said that its ratings for the four major banks and Macquarie remained unchanged reflecting their expectation of government support in the event of a crisis.

Among the other financial institutions who were downgraded by S&P Global Ratings were AMP Bank, Australian Central Credit Union, Auswide Bank, Community CPS Australia, Credit Union Australia, Defence Bank, Fisher & Paykel Finance, G&C Mutual Bank, Greater Bank, IMB, Liberty Financial, mecu, Members Equity Bank, MyState Bank, Newcastle Permanent, Police Bank, Qudos Mutual, QPCU, Rural Bank and Teachers Mutual.
 
Under the base case modelled by its analysts, S&P Global Ratings expects recent and "possible further actions" by the regulators to assist in an orderly unwinding in Australian house prices. It follows S&P Global Ratings decision to put 25 Australian banks and lenders on "negative watch" in October 2016.


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