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Banks Could Lose A$7 Billion on Homes, Deutsche Bank Says

Banks Could Lose A$7 Billion on Homes, Deutsche Bank Says
Property listings are displayed in the window of a real estate agency in Sydney, Australia. Photographer: Ian Waldie/Bloomberg

Australia’s biggest banks may lose about A$7 billion ($7.5 billion) from a 30 percent drop in home prices and a 9 percent default rate, Deutsche Bank AG said.

Mortgages account for about 60 percent of lending at the nation’s four largest banks, and Australian house prices are likely to fall further, said Gus Medeiros, head of credit research and strategy at Deutsche Bank, in a report. Still, favorable macro conditions and monetary policy flexibility reduce the risk of an excessive correction, he wrote.

Home prices in Australia’s eight capital cities fell 0.3 percent in April, and decreased about 1.5 percent over the year that ended April 30, according to figures from real estate researcher RP Data. Mortgage defaults are also rising and the number of properties listed for sale is rising, adding weight to claims the nation is on the brink of a housing rout.

Deutsche Bank assessed Commonwealth Bank of Australia, Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd. and Westpac Banking Corp. in the report.

Commonwealth Bank spokesman Steve Batten, ANZ Bank spokesman Kevin Foley and National Australia spokeswoman Meaghan Telford didn’t immediately respond to e-mail and phone messages seeking comment. Westpac Bank spokeswoman Jane Counsel directed a request for comment to the group’s half-year results released May 4, which detailed the quality of the bank’s mortgage book, a reduction in “low-doc” lending and delinquencies that remained below industry levels.

Basel Requirements

Australian banks have A$130 billion of bonds maturing in the next 12 months, and may issue about A$144 billion of new debt in the same period, according to the Deutsche Bank report, authored by Sydney-based Medeiros and senior credit analyst Colin Tan.

Tougher capital and liquidity requirements faced by the lenders under the Basel Committee on Banking Supervision’s new global standards are ”manageable,” they said.

Still, Commonwealth Bank, Westpac, National Australia Bank, ANZ Bank and Macquarie Bank Ltd. face a A$223 billion “gap” as they seek to meet Basel’s net stable funding ratio, with National Australia Bank having the biggest shortfall, the Deutsche Bank analysts wrote.

Stable funds are resources that banks can expect to have for at least a year even in stressed market conditions, for example term deposits and long-standing retail deposits.

The Basel measures, scheduled to become binding at the start of 2018, will set a minimum amount of stable funds that banks will have to use to finance different types of lending.

The banks face losses ranging from A$61 million in the mildest scenario to A$41.7 billion in a year, the report said. The smallest loss would result from a 1 percent default rate and a 10 percent home-price decline, while the worst-case scenario is based on a 15 percent default rate and a 60 percent plunge in housing values, Deutsche Bank said.

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