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Continuing RBA monetary policy tightening in the first and second quarters of 2010 has impacted arrears performance
The RBA increased the cash rate target by 25 basis points during March with two further consecutive rises of 25 basis points each during April and May. This has taken the cash rate to a current rate of 4.5 per cent from a low of 3.0 per cent between April and early October 2009.
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Fitch Ratings has seen arrears performance during Q1 2010 start to deteriorate on the back of the rising cash rate, which has flowed through to home loan lenders' lending rates.
Fitch's Dinkum Index, which tracks arrears across all Fitch rated residential mortgage backed securities (RMBS), has seen an increase in its prime index during the first quarter with 30+ day arrears increasing from 1.19 per cent to 1.38 per cent.
The increase was mainly attributable to 30-59 day delinquencies which rose from 0.52 per cent to 0.65 per cent with almost no change in the 90+ day arrears, which remained at 0.49 per cent.
All low doc loans evidenced an increase in the 30+ day delinquencies, which jumped from 4.82 per cent to 5.53 per cent; most of this increase was attributable to the 90+ delinquencies which rose 0.31 per cent to 2.67 per cent.
The deterioration in later stage arrears for low doc loans could be explained by Christmas credit spending rolling over into the New Year and successive rate rises in the last quarter of 2009.
Non-conforming low doc loan arrears remain persistently high with 30+ day arrears increasing from 16.5 per cent at Q409 to 17.7 per cent at Q110, while conforming low doc arrears also rose, but at much lower levels, from 2.8 per cent at Q409 to 3.6 per cent at Q110.
The RBA have held rates steady at 4.50 per cent since May 2010, after 6 rate increases since October 2009.
With decreasing unemployment, and a strengthening economy, the RBA is expected to increase rates further during 2010, putting continued upward pressure on borrower's ability to service debt.
Fitch anticipates an increase in arrears for both conforming and low doc borrowers during the remainder of 2010 as compounding interest rate rises impact borrowers and flow through to rises in Fitch's Dinkum Indexes.
Oz banks positioned well on ratings front
Australia's major banks continue to perform well despite ongoing funding challenges, according to Fitch Ratings.
Fitch director Tim Roche said despite some deterioration, Australian bank asset quality remains sound.
"It is one of the main reasons why the major banks have retained access to wholesale funding markets during the crisis," he said.
Nevertheless, Mr Roche said the banks' reliance on offshore wholesale funding means they remain vulnerable to future disruptions in global markets.
Fitch expects asset quality deterioration to continue to moderate through the remainder of 2010 and into 2011, barring a significant weakening in the global economic recovery.
At the same time, a sharp rise in house prices over the past year may indicate a level of overheating in the housing market; however underwriting standards appear sound, with banks having tightened them since 2007.
Furthermore, the risk of material loss from the mortgage portfolios is largely mitigated through the use of lenders' mortgage insurance.
Fitch's long term IDR outlook for ANZ is ‘positive' with a AA- rating, while CBA, NAB and Westpac have a ‘stable' outlook, with a AA rating.
