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Australia's big banks face drag from mortgage lending amid COVID-19

Australia's major banks may see their mortgage lending fall and defaults rise as the economy slows and borrowers feel the pinch from the coronavirus pandemic, putting a drag on a major source of business for the lenders, analysts say.

As Australia emerges from a lockdown imposed to control the spread of novel coronavirus, higher unemployment may hurt household budgets and trigger defaults as the local economy stares at its biggest contraction since the 1930s. Australia's unemployment rate rose to 7.1% in May from 4.9% at the end of December 2019, according to recent government data. The unemployment rate is expected to peak around 8% by September, Treasury Secretary Steven Kennedy said at a special Senate committee hearing.

After government subsidies end and the moratorium on loan repayments is lifted, borrowers will find it exceedingly difficult to repay loans if they do not have jobs, Michael Berman, CEO and co-founder of PsyQuation, told S&P Global Market Intelligence in an email. Nearly 500,000 mortgage loans of about A$180 billion have been deferred, according to the Australian Banking Association.

"The household sector is heavily indebted and is highly dependent on income and a rising housing market to support the entire financial system. Mortgage lending is likely to see a major drop in coming months," Berman said.

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Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. accounted for nearly 80% of the residential loans and more than 75% of the total commercial property loans in the country in the January-to-March quarter, according to data from the Australian Prudential Regulation Authority, or APRA.

Australian lenders made A$95 billion of new mortgage loans in the March quarter, an increase of 20.1% over the same period last year, the APRA said in a June 9 statement. However, measured over the previous three-month period, mortgage loans declined 10.9%, likely due to seasonality of the housing market but also due to "potential early changes in borrower sentiment with the onset of COVID-19," the regulator said.

Households are already in mortgage stress due to lower incomes following the virus outbreak and the nation may "see a significant jump in mortgage defaults" this year, said Graham Cooke, a researcher at Australian mortgage comparison site Finder.

"When we surveyed leading economists in December 2019 more than three-quarters of them said mortgage defaults were unlikely to rise in 2020. How quickly things change," Cooke said.

Banks are likely to become more cautious in writing out new loans, too. The risky environment will lead to tougher conditions for borrowers, Cooke said. "Lenders are likely to ask for more information and scrutinize expenses more closely. ... Indeed, some borrowers have already seen this happening," he said.

However, the major Australian banks are now more resilient than before, having built capital buffers over recent years. Facing the pressure on earnings, the major Australian banks have sought to conserve capital, heeding APRA's advice. Westpac and ANZ deferred a decision on their interim dividend, while NAB cut its payout to 30 cents per share from 83 cents per share a year ago.

Banks were right to cut dividends and bolster balance sheets with equity raising as they enter this period of uncertainty, PsyQuation's Berman said.