Westpac Warns of Rise in Consumer Defaults on Mining Slowdown

  • Defaults inching up in mining states of Queensland, WA
  • Westpac CEO Hartzer says consumer-loan stress levels are low

Westpac Banking Corp., which increased provisions for soured loans to the highest in six years, said it expects consumer defaults to rise in the six months to Sept. 30 as the mining slowdown leads to job losses in some parts of Australia.

The first signs are already there, with Australia-wide mortgages overdue by more than 90 days climbing to 0.55 percent of total loans by March 31 from 0.45 percent six months earlier, the lender said as it posted first-half earnings that missed estimates.

Westpac’s warning underscores the broader challenges the economy and lenders face as the turn in the commodities cycle. The lender said it was seeing increased stress in regions such as the states of Queensland and Western Australia, which have been impacted by weaker prices of commodities including coal and iron ore.

“We expect some increase in consumer delinquencies over the second half, but this is likely to be concentrated in segments and sectors that are more reliant on the resources industry,” Chief Executive Officer Brian Hartzer said. These are still “low levels of stress,” and the overall asset quality is stable.

Consumer Debt

Westpac said Monday provisions for soured loans almost doubled to A$667 million ($507 million) in the six months to March, the highest level since the first half of 2010, largely due to four stressed corporate loans to firms it didn’t identify. It blamed seasonal trends, where delinquencies rise in the first half, and a change in the way it computes the measure for the increase.

While business-loan losses were behind the biggest bad-debt cycles in the past three decades, according to a discussion paper from the Reserve Bank of Australia, unprecedented borrowing by individuals and signs that the residential property market is coming off the boil mean consumer defaults could come to the fore. That has prompted regulators to impose higher capital requirements on Australian lenders, leading to a record A$20 billion equity raising by the four largest banks in 2015.

Australian household debt as a proportion of gross domestic product has risen to a record 134 percent, the highest among 36 developed- and emerging-market nations analyzed by Barclays Plc, according to a note from the bank late last year. The developed-market average is about 74 percent. In contrast, Australian corporates had leverage of about 80 percent of GDP versus a developed-market average of 121 percent, the note said.

Mortgages accounts for two-thirds of the assets of Australia’s largest lenders -- Westpac, Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia and National Australia Bank Ltd. That compares with about 2 percent exposure to the mining industry, according to their filings.

“The modest pace of economic growth and rising unemployment in some regions has contributed to higher delinquencies in certain areas,” Westpac said. “This is being offset by lower stress” in New South Wales state, where the economy has been expanding.

Before it's here, it's on the Bloomberg Terminal.