Bank profits jump but rising interest rates are a double-edged sword

Australia’s big banks raked in nearly $30 billion in 2022, but face a tougher 2023 as some borrowers struggle to pay their mortgages as interest rates soar.

In 2022, Australians took advantage of historically low interest rates to buy the Aussie dream, helping banks post windfall profits.

The combined cash profit of the country’s largest banks rose 6% to $28.5 billion, the best result since 2018 according to accounting firm PWC.

And that’s even as banks’ net interest margin – the amount they charge to borrow versus what they pay for funding – has fallen to a record low of 1.77% due to competition. fierce for home loans.

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Mortgage customers most at risk as banks raise interest rates(Sue Lanin)

PWC Banking chief Sam Garland said big banks have come through the pandemic by making more loans, cutting expenses and simplifying their operations.

“Loan growth of around 7% which actually offset a decline in margins for the full year,” he said.

“The second major driver was notable spending, including corrective actions, which decreased by $1 billion for the year.”

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Sam Garland, leader of PWC Banking, says some borrowers are facing a fixed-rate “mortgage cliff”. (ABC News: Billy Draper )

Banks are also making more money by charging customers higher interest rates as the Reserve Bank raises official borrowing costs to curb inflation.

Australians with variable mortgages from Commonwealth Bank, National Australia Bank and ANZ saw their interest rates rise another 0.25 percentage points on Friday as the RBA’s latest rate hike takes effect.

But as rates continue to rise, banks are on the lookout for increased bad debt and defaults, especially if much of the world, and even Australia, slips into recession.

UBS head of banking research John Storey believes banks will remain profitable even though the Australian economy is expected to slow significantly next year.

“There are a number of challenges facing banks.”

“It is clear that rising interest rates will put pressure on consumers,” he said.

“Banks are well capitalized in what is going to be a tougher economic environment, but they have the earnings power to actually absorb some of these higher losses or expected losses.”

“Fixed Rate Mortgage Cliff”

The Reserve Bank has admitted that its rapid interest rate hikes could see some households fall behind on their mortgages and possibly default on their loans.

This includes some first-time home buyers and households with lower savings and high debt.

A man in a blue suit stands against a window in Sydney
According to John Storey, head of banking research at UBS, higher interest rates will put pressure on consumers and bank results. (ABC News: Daniel Irvine)

John Storey said the borrowers most at risk of defaulting on their mortgages are those who entered at the height of the market, when house prices were at an all-time high.

“These are probably clients who took out loans, I would say in the last six months, the last 12 months, where interest rates were at their lowest, and probably house prices were at their peak. .”

Sam Garland said borrowers on fixed rate mortgages are among those at risk of losing their homes.

“This is being described as the fixed rate mortgage cliff that occurs in 23 and 24 because for many borrowers it will mean going from a rate of 2% to well over 4% on their mortgage,” he said. he declares.

“There’s no doubt this is going to be a big adjustment for a number of customers.”

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But National Australia Bank chief executive Ross McEwan told The Business this week that he is not panicking even if fixed rate mortgage customers see rates rise from around 2% to 5 or 6% or even more.

“The customers that we think are most vulnerable are the ones that are seeing increases even beyond, say, 3% above what they had, and that’s the group that we’ve looked at and seen what’s the current behavior. Are they still able to pay?”

Mr McEwan said around $1 billion to $10 billion of the bank’s $320 billion loan portfolio would be at risk if the cash rate hit 3.6%.

About a third of NAB borrowers on fixed-rate loans will have their terms rolled over by September next year, with the rest for the next two years.

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Signs you’ve become a “mortgage prisoner”

RBA big stick

The RBA raised interest rates from a record high in May to 2.85% to curb the highest inflation in three decades.

He slowed the pace of rate hikes earlier this month by offering a 0.25 percentage point hike, instead of a 0.5 percentage point hike, as he worries about risks to investors. global and national economies.

And Reserve Bank Deputy Governor Michele Bullock indicated this week that the central bank may ease further rate hikes again to protect the labor market.

“We have made some very big gains in terms of jobs in the Australian economy,” she told a trade function this week.

“We could crush the economy very hard and bring inflation down very quickly, but we would most likely lose those gains.”

That’s not all that would be lost if Australia entered a recession.

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