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ASX big bank profits haunted by zombie mortgages

zombies
Credit: Caio Schiavo

ASX big bank stocks could soon be facing a new challenge after a recent survey found that more than half of borrowers on deferred mortgages are suffering from poor financial health.

What’s more, the banks may not be fully aware of how much financial pain these distressed borrowers are suffering, according to UBS who undertook its sixth mortgage survey.

This is the same broker that warned about “liar loans” in past surveys, where borrowers overstated their income and understated their liabilities in order to secure a home loan.

Are ASX banks underestimating the number of zombies?

Lenders have allowed customers to defer loan repayments till end of September due to COVID-19. The banks are contacting these mortgagees to see if they are able to resume regular loan repayments.

There could be more “zombie mortgages” out there than the market believes. These are loans that are kept alive only because of the temporary goodwill shown by the banks and government support payments.

The problem is made worse by liar loans. UBS anonymously surveyed 904 borrowers from late July to September who took out a new loan in the past year.

Liar loans remain an ongoing issue

“Once again, we found 37% of the sample stated their mortgage application was not ‘completely factual and accurate, a level consistent with the previous five vintages,” said UBS.

“Of more concern, the credit quality of customers who misstated their mortgage were significantly weaker than truthful customers.”

Majority of distressed borrowers still in trouble

The latest survey found that 53% of those on deferred loans did not intend to return to normal payments, while 32% intend to switch to Interest Only (IO) and 21% intended to ask to extend deferral.

“However, the credit quality of customers intending to ask their bank to extend their deferral is concerning,” warned the broker.

Of these borrowers, 40% had overstated their income by an average of 21% in their mortgage application. UBS also found that 15% understated other debts, 67% are on JobKeeper and 25% are on JobSeeker.

Threat to ASX bank profits

This group also reported a 19% drop in average income due to COVID-19, and this is on top of the overstated income on their loan application!

“Unfortunately, we found the financial position of those asking to move to IO is only marginally better,” added UBS.

“We believe the banks need to undertake significant due diligence before extending deferrals or moving deferred customers to IO, as a large number of these borrowers are likely to be under more stress than the banks perceive.”

No turnaround for ASX bank stock share prices

Bank stocks have underperformed the S&P/ASX 200 Index (Index:^AXJO). The Commonwealth Bank of Australia (ASX: CBA) share price, National Australia Bank Ltd. (ASX: NAB) share price, Westpac Banking Corp (ASX: WBC) share price and Australia and New Zealand Banking Group (ASX: ANZ) share price have fallen between 20% and 30% in 2020.

In contrast, the ASX 200 lost around 12% over the same period.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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