The business of risk and worry

Against the prevailing commentary of a cost-of-living crisis and mortgage cliffs, we are still not seeing that translate into increased customer delinquencies or defaults in ANZ’s mortgage book.

" In fact, people are doing exactly what the Reserve Bank of Australia asked them to – adjusting their spending patterns and spending more prudently.”

Rather, the vast majority of our customers are in relatively good financial shape and their household finances remain robust. Customers in default currently account for about 0.6 per cent of ANZ’s mortgage book, compared with about 1.2 per cent before the COVID pandemic. Similarly small business delinquencies are substantially lower than pre-COVID.

About 70 per cent of our customers are ahead on their mortgage repayments and roughly one third are two years in advance. And offset balances are 50 per cent higher than pre-COVID. The proportion of small business customers with savings buffers of more than 12 months (58 per cent) is also much higher than before the pandemic (49 per cent).

Cost of living

That doesn’t mean our customers aren’t feeling the pinch of inflation and cost of living increases. With customer deposits still increasing, the slight reduction in offset accounts show customers are using these funds to pay some of the increase in mortgage and other costs.

In fact, people are doing exactly what the Reserve Bank of Australia asked them to – adjusting their spending patterns and spending more prudently. Our transaction data shows reduced spending on discretionary items like retail, cafes, accommodation, subscription services and gym memberships.

While customers have proven pretty resilient, we are realistic. We know there’s going to be more stress. For customers starting to feel that stress, my message is: we are well placed to assist. Reach out and talk to us, we’re ready to help. We have a pool of experienced people who are here to help.

Mortgage cliff

ANZ has passed the peak of customers coming off fixed-rate loans. While mortgage repayments have increased, customers rolling off a fixed rate are performing better than the rest of the portfolio.

It’s likely people worried about the gap between fixed rates and variable rates didn’t fully appreciate the assessment process we undertake. People may forget when we assessed our customers’ ability to pay their mortgage, we determined it on the variable rate at the time (because the loan reverts to a variable rate) and an added serviceability buffer.

In the meantime, many people have seen an increase in their salary levels. Also, 98 per cent of ANZ customers do not borrow to their capacity.

We wrote more fixed loans than other bank in the early months of COVID, when people used the first set of lockdowns as an opportunity to adjust their pricing and lock in reduced rates. This meant we saw earlier than other banks customers coming off the one or two-year fixed rates. And it showed they were performing better than the rest of the mortgage book.

You never say you’re never worried as a Chief Risk Officer – it’s my job to worry – but the data suggests these customers – taking into account their deposits, savings, prudent spending and the fact they haven’t borrowed to capacity – tells me they should come through okay. It also reflects the tighter underwriting standards banks have employed in recent years too.

What, me worry?

The three main causes of customers defaulting on a loan are job loss, marriage breakdown or illness.

If people have confidence they have (and will keep) their job, can get a job or even get a second job, that encourages confidence to spend and confidence to make repayments.

We factor unemployment data into our forecasts when looking at potential future delinquencies and out credit provision levels. We have substantial provisions on the balance sheet based on unemployment levels substantially higher than today's rate.

Australia’s unemployment rate held steady at 3.7 per cent in August, akin to full employment. Our customers are showing the confidence to continue servicing – and even getting ahead – on their loans.

Key to that confidence is the unemployment rate. When I look at the resilience of the portfolio and our customers, I believe it points to a reasonable outcome.

That said, if unemployment goes up, it’s likely more people will become financially stressed. And if that happens, I want them to know they can reach out and talk to us.

Kevin Corbally is the Chief Risk Officer at ANZ