Majors can absorb mortgage stress: Fitch

It is likely that Australia’s major banks could withstand a severe downturn in the domestic mortgage market, although such a downturn is probably not imminent, according to Fitch Ratings.

“Even in a severe downturn, gross losses incurred by the four major banks in their mortgage portfolios would be manageable,” said the senior director at Fitch Ratings, John Miles.

“Of more concern would be the broader state of the economy should such a downturn ever occur and the impact this would have on commercial loans,” he said.

While Australian house prices appear high, household debt has also risen steadily, creating a high household debt/income burden. This burden and the banking sector’s reliance on external wholesale borrowings are key vulnerabilities, according to Fitch.

In a special report that examined three mortgage market downturn scenarios of varying degrees based on loan defaults and decreasing house prices, Australia’s four major banks showed a high capacity to absorb mortgage losses even under severe mortgage market downturn assumptions, Fitch found.

This was largely due to relatively low loan to value ratios and the protection afforded by lenders’ mortgage insurance, Fitch stated.

The more severe scenarios resembled the experiences of countries affected by mortgage downturns during the global financial crisis, such as the US and Ireland, but Fitch’s mild scenario is more in line with Australia’s worst-case experience to date, Fitch stated.