A global survey of banks shows that Australian lenders are becoming more worried about their customers' ability to repay their loans.
The report by accounting firm PwC, highlights the large exposure of Australian banks to house mortgages, with the banks receiving much more of their income from mortgages than most other countries. Around half of all the banks' lending is made to residential housing.
Interest rate risk has jumped from 30th in 2012 to 6th on a list of concerns for banks, according to the survey. With the Reserve Bank's official cash rate at all-time lows and many mortgages available for under 5%, fears are growing that rising interest rates will put enormous pressure on borrowers, affecting their ability to repay loans.
Mortgage competition has increased over the past six months, putting pressure on lending standards and pressure on profit margins. According to comparison site, finder.com.au, seven lenders have dropped their variable home loans by as much as 0.17% so far this year. Yellow Brick Road Holdings Ltd (ASX: YBR) has dropped its Rate Smasher Home Loan by 0.05% to 4.68%, according to finder.com.au., joining others including HSBC, Citibank, Homeloans Limited (ASX: HOM), Bank of Queensland Limited (ASX: BOQ), Westpac Banking Corporation (ASX: WBC) and Australia & New Zealand Banking Group (ASX: ANZ).
Spokesperson Michelle Hutchison notes that despite the increasing competition, the big four banks, which already dominate the home loan market, have increased their market share. According to data from the Australian Prudential Regulation Authority (APRA), the big four's combined market share has increased to 84%, from 81% in February 2013.
Australian household debt is estimated at 177% of annual disposable income by Barclay chief economist Kieran Davies. It's a sign that rising interest rates could negatively affect mortgage borrowers' capacity to repay their loans.
Foolish takeaway
As Clime Asset Management's John Abernethy pointed out to the Australian Financial Review, "when we see a correction in housing prices, higher interest rates, and a lack of capacity to repay back loans quickly – you can get whiplashed dramatically in the banking sector." Investors buying shares in the big four banks at current levels take heed.
