SYDNEY (Reuters) – Australia’s four major banks could suffer a ratings downgrade in the event of a severe housing market downturn with second-order economic effects, a stress test published by Fitch Ratings showed yesterday.
The test was undertaken as risks within the household sector continue to grow, the ratings agency said, adding Australian banks were vulnerable due to their large mortgage books.
House price growth across Australia’s major cities have already tempered since late last year, and the run of losses is generally expected to continue as banks clamp down on so called “liar loans” amid an exhaustive year-long public inquiry.
Just a few weeks after it commenced, a comprehensive, year-long Royal Commission has already uncovered a series of poor lending practices and wrongdoings among banks as they compete to expand their loan books.
Fitch’s stress test showed Commonwealth Bank of Australia and Westpac Banking Corp – the country’s top two mortgage lenders – experiencing the largest losses.
But the proportionally larger commercial exposures of Australia and New Zealand Banking Group and National Australia Bank would render them vulnerable in a broader stress event, Fitch added.
Australia’s four biggest banks derive 40-60 percent of their earnings from home loans, the most lucrative part of their business.
