NAB has identified A$9.7 billion of home loans in its Australian mortgage portfolio and $8.5 billion of business loans in its business and private banking division as posing “higher risks” in the face of higher interest rates, inflationary pressure and a likely economic slowdown.
Speaking at the presentation of the bank’s results for the year to September yesterday, NAB chief financial officer Gary Lennon said the bank expected Australian house prices to fall 20 per cent from peak to trough in the current cycle and the cash rate to reach 3.6 per cent next year.
It expects GDP growth to slow to 0.8 per cent next year and unemployment to rise to 4.2 per cent.
The “most-at-risk” cohort of home loan borrowers are those with dynamic loan-to-valuation ratios above 90 per cent and repayment buffers of less than three months. This group represents $1 billion of the $329 billion Australian mortgage portfolio.
A larger group of “higher risk exposures”, with LVRs above 80 per cent, repayment buffers of less than 12 months and no first home buyer guarantees, represents $9.7 billion of loans.
Lennon said 77 per cent of the bank’s $178 billion variable rate principal and interest book will pay an average of $549 a month more if the cash rate settles at NAB’s forecast rate of 3.60 per cent.
On the positive side, since rates starting rising borrowers have been adding to their offset accounts. The bank’s offset balances increased by 30 per cent in the September half.
Lennon said the bank has a program of early engagement with customers it has put in the higher risk category.
It has also slowed new mortgage lending. After growing its loan book above system for most of the year it dropped to 0.6 times system growth in the September quarter.
On the business lending side, the business and private banking loan portfolio has $8.5 billion of higher risk balances in a book worth $132 billion. Those loans are not fully secured and have been assessed as having a probability of default of 2 per cent or more.
Of those loans, $1.5 billion are unsecured and are in the highest risk category.
Lennon said indicators that business borrowers are in good shape are utilisation rates that are lower than during the pre-COVID period and a 25 per cent growth in business customer deposits over the past two years.
“There is a strong business credit pipeline but clients want to see that their investment decisions are the right call. At the moment it feels like a soft landing and we expect the pipeline to translate into activity,” he said.