Balance sheet quality holds up

A sluggish economy and lingering higher rates have caused an uptick in loan arrears and caused households to draw down savings. But the major banks say the former is well within normal ranges and the latter has not adversely affected the deposit market.

DAVISON Turning to the balance sheet beyond wholesale funding, are the banks observing any changes in deposit dynamics due to, for instance, falling household savings or a view on the rates direction?

WALLER Household deposits remain strong. There has been a drawdown of savings in this sector but it has been matched by flows elsewhere, such as offset balances, to the extent that the total deposit pool has grown somewhat, year on year.

For Commonwealth Bank of Australia, our customer deposit ratio recently reached a new high, of 77 per cent. This certainly takes the pressure off our long- and short-term wholesale funding requirements.

CARROLL We have also experienced growth in offset balances and savings products. Deposits have been stickier than we might have expected, in fact – and the growth we have experienced is high quality. This has been a key factor contributing to our lower wholesale funding requirement this year.

PERRIGNON Are conditions similarly stable on the asset side, particularly in mortgage arrears performance? With unemployment and house prices still fairly benign I assume the situation is relatively resilient.

JOHNSON There has been an uptick in arrears across all lenders, as reported in the last period. The key thing, though, is that impairments remain extremely low within the cycle – supported by overall asset prices and the solid performance of the economy. This said, we are always very cautious, including maintaining very strong provisioning across the portfolio.

WALLER With arrears, the term we have used and continue to use is that they have normalised. They are back to, or at least approaching, the long-run average. This is an uptick but it certainly isn’t a worrying increase.

CARROLL We believe requests for hardship in our portfolio probably peaked in June-September 2024. The way we frame it is that we have seen some stress but no distress in our mortgage book. There has been a period of stability in rates that has given borrowers time to adjust to the pressures on the household sector.

DAVISON There was the possibility that higher for longer could start to have a capitulation effect – that households could hold out for a while by running down savings or adjusting spending elsewhere, but eventually they would not be able to maintain this. It sounds like the suggestion is that the opposite may be true: that higher for longer is obviously painful for mortgage holders but once they have adapted they can manage on an ongoing basis.

CARROLL I think this is right – a period of stability is helpful. On the direction of rates, while the timing is uncertain there is a fairly high degree of conviction that the next move will be down.

GIFFORD The fact that the housing market has been strong is also helpful in this context. Even borrowers that may have overextended themselves have the opportunity to ‘self cure’ by selling their homes into what, generally, is a pretty strong market in most localities.

Melbourne is the outlier, but someone who is overextended in Brisbane, Sydney, Adelaide or Perth has the option of selling their house at a level that is likely higher than where they bought it.

For arrears to accumulate on a bank’s balance sheet generally requires a combination of probability of default and loss given default. This means unemployment and a falling housing market.

WALLER We should acknowledge that spending data indicate borrowers’ money is being directed more toward essentials than discretionary. But there has been enough scope in household balance sheets to cope.