Loan arrears drop in Q3

THE DINKUM Index, a quarterly report produced by Fitch Ratings that tracks the performance of securitised mortgage loans in Australia, has reported another decrease in arrears during the third quarter of 2010.

According to Fitch, 30+ day delinquencies decreased to 1.30 per cent in September from 1.32 per cent in June, despite cash rate rises delivered by the Reserve Bank of Australia in March, April and May.

The improvement, shown by the index however, is mainly technical and should not be mistaken for a material improvement in performance. The decrease in arrears is due mainly to the inclusion of new constituents with lower than average arrears, as well as a migration of 90+ days delinquencies into foreclosures and claims (which are not part of the index).

Excluding the newly-inserted transactions, the index would have experienced an increase in arrears to 1.37 per cent in Q310.

Nevertheless, the picture for Q310 is not as gloomy as expected: deterioration remains limited and households in the prime sector have proven an ability to withstand a raise in their mortgage payments by 75bp. The three consecutive interest rate rises, which ended in May 2010, have considerably impacted both non-conforming and prime low-doc borrowers.

A low-doc mortgage is a loan for which the borrower is not required by the lender to provide full documentation (e.g. income). Fitch's Low-Doc Dinkum Index has recorded 30+ days arrears at 5.79 per cent in Q310, up 47bp (or 8.8 per cent) from Q210. Prime low-doc borrowers have, however, experienced the worst, recording overall arrears of 3.97 per cent in Q310, a new high.

Fitch's view is that the interest rate shock will not be permanent and borrowers in arrears are expected to adjust their spending. This might take several months, but it is unlikely we will see a strong adjustment in performance during the next few quarters.

In fact, November's cash rate increase of 25bp and Christmas 2010 spending are expected to negatively impact performance in the next two quarters.

FITCH AFFIRMS BENDIGO AND ADELAIDE BANK RATINGS

Fitch Ratings has affirmed the ratings of Bendigo and Adelaide Bank at ‘BBB+' (Outlook Positive), following its announcement it would acquire a 100 per cent shareholding in Rural Bank Limited by purchasing Elders' 40 per cent stake in the bank.

Rural Bank is a specialist agribusiness lender, with total assets of $4.2 billion as at 30 June 2010. Bendigo and Adelaide Bank is one of Australia's regional banking groups, with consolidated total assets of $52.1 billion as at 30 June 2010.

According to a Fitch report, the rating affirmation of Bendigo and Adelaide Bank reflects the relatively modest impact the acquisition is expected to have on the bank's credit profile.

The $165 million purchase for the 40 per cent stake will be funded through the issuance of Lower Tier 2 subordinated debt. Fitch believes the bank's capital position will remain unchanged, given the "relatively low risk nature" of the bank's lending activities.

"From a governance perspective, Rural Bank's policies and procedures are already largely aligned with those of Bendigo and Adelaide Bank, which should lower integration risk."