A faint yet clear warning bell just rang on Australian household debt

A boy ringing a bell at Santa Cruz, Bolivia, circa 1955. (Photo by Three Lions/Getty Images)

Three of four major Australian banks are reporting results this week and Westpac was first to go this morning, posting a 3% rise in cash profit over the six months to March.

Its $3.9 billion cash profit was a miss on the $4.1 billion expected by the market, with some of the damage due to an increase in bad loans.

Impairment charges for Westpac increased from $412 million to $667 million, a huge percentage jump although still small relative to the giant Westpac balance sheet.

The bank attributes $298 million in the $471 million in new bad loan charges to just four individual companies. So the big chunk of the new risk doesn’t appear to be broad-based.

Chief executive Brian Hartzer said: “… overall asset quality remains sound, with the level of stressed assets little changed over the half. There have been a few pockets of stress, mostly related to lower commodity prices, and an increase in provisions for a small number of larger exposures, which contributed to a rise in impairment charges.”

And the bank says it expects a reduction in its level of impairment charges in the second half of this year. So, not much to worry about, right?

Not quite.

The bank reported a small but clear uptick in the levels of Australians falling behind on their loan repayments, across mortgages, personal loans, and car loans.

While these are not anything material to the bank yet, together the figures on these rates show there appears to be an increasing level of Australians who are struggling to make ends meet.

First, mortgages. This chart shows the state-by-state breakdown of where people are falling behind on home loan payments. It is, as you would expect, the states hit hardest by the end of the mining boom that are most affected. Other states appear to be showing a potential bottoming out as well.

This next chart shows that while only a tiny proportion of the loan book is affected, there has been a big surge in the number of loans behind by 30 days, and those more significantly behind are ticking up a bit too.

Finally, the stress isn’t just hitting the mortgage payments. People are increasingly falling behind on personal and car loans, too.

Source: Westpac

The middle of last year, you might remember, was when the major banks, under pressure from the regulator APRA, started jacking up interest rates on its loans to investors. The rate of delinquencies appears to have started to rise in the months following.

It is impossible to see how this trend could be confined just to Westpac customers. As ANZ and NAB also update the market this week we should expect to see more of this.

It’s important to repeat, and to stress, that the value of these loans is tiny in relation to Westpac’s vast loan portfolio. On the positive side, the bank also reported today that 72% of its borrowing customers were actually ahead on their loans.

But at a time when there are all sorts of pressures on Australian bank profitability there will be tough questions if this uptick continues over the next six months.

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