Unemployment could hurt our big banks

As the politicians argue over power, Australia’s mining boom is slipping past and may leave a trail of disaster for our banks in its wake.

Results released by Fitch Ratings have shown that 1 in 400 mortgagees fell behind more than a month on their repayments in the six months to March 2013. In addition, the number of “delinquent” mortgages rose 1.2% and said the ratings agency said the RBA’s decision to cut the “cash rate did not have a positive impact on mortgage performance”.

This suggests that no matter what the RBA may do to the cash rate, mortgagees without jobs will not be able to repay outstanding loans. This is evidenced by areas that have higher unemployment such as in Sydney’s south west and western suburbs.

The Age says that, “The figures are seen as a potential forward indicator of lending losses for banks, which have so far avoided any fallout from signs the labour market is weakening”.

Last week, it was announced that over 1,000 mining jobs would be axed from coal and iron ore projects owned by some of the world’s biggest resources companies. Although this is just one of many instances of job losses in the past two years, it has ripple effects for our biggest banks.

The ANZ (ASX: CBA), Commonwealth (ASX: CBA), NAB (ASX: NAB) and Westpac (ASX: WBC) compete furiously for mortgages because it is their biggest money maker. The CBA currently has the largest share and enjoys the title of Australia’s biggest bank, followed by Westpac, then ANZ.

Foolish takeaway

If we see unemployment rise, many mortgage holders will fall behind on the huge loans that have come from expensive house prices and little growth in the industry, adversely affecting lenders. This is why it is vital, even though they may not like it, to have a highly regulated industry and make the banks scrutinise applicants before deciding to lend such large amounts to new and existing home owners.

However, despite what some financial commentators say, Australia has a rock solid financial sector and we are better placed than many foreign countries to deal with slow housing growth and an economic shift. In the words of arguably the most successful investor ever (Warren Buffett) “Be fearful when others are greedy, and greedy when others are fearful”.

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ.

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