Fitch: Positive Signs for Australian Mortgage Intervention

Fitch Ratings says in its latest APAC Banks Chart of the Month that the strengthening of Australian banks' mortgage underwriting should ultimately prove positive for asset quality. However, weaker underwriting over the past 24 months may mean a risk of a modest increase in mortgage arrears and losses in 2016 and 2017.

The improved underwriting is largely the result of regulatory intervention in 2015, which we believe is also likely to result in stronger competition for owner-occupier loans. This may lead to looser underwriting to this segment, although we expect the regulators to remain proactive in addressing risk appetite. Higher mortgage risk-weights for the major banks, to be implemented in 1 July 2016, could have a modest impact on pricing and/or mortgage appetite, which in turn may lessen the competitive pressure.

More broadly, we believe regulatory intervention is having the intended effect, with higher-risk loan classes falling as a proportion of loans approved in the September 2015 quarter. In addition, the proportion of loans with a loan-to-value ratio above 80% at origination continues to moderate. Yet household debt is still rising, leaving the mortgage books more susceptible to rising unemployment or higher interest rates.