TOL - 22nd Aug, 2023
Aussie corporate and home loan defaults continue to climb sharply...
There are huge signs of stress in the non-bank home loan, commercial real estate and construction industries
Our analysis of the weekly insolvency data from ASIC shows they continue to trend higher, led by the construction industry. The ailing commercial real estate and residential development sectors---where businesses are seemingly going bust every week---are obviously creating enormous problems for the non-bank lenders that finance them. These liquidity and insolvency issues will likely only get worse. The first chart below tracks weekly insolvencies across all industries, which are trending higher. The second chart shows soaring construction industry insolvencies while the third highlights stresses in hospitality.
We are also seeing ongoing duress in non-bank lenders' home loan portfolios as 30+ days arrears continue to rise strikingly. This will likely persist because Aussie borrowers have only seen about ~273bps of the 400bps of RBA rate hikes thus far due to 1/ fixed-rate loans that have not yet rolled over to floating-rate and 2/ the fact that banks have not passed on more than >50bps of RBA hikes to variable rate loans simply due to intense competition in the lending market. The first chart below shows 30+ days delinquencies on all home loans securitised by both non-bank lenders (blue line) as compared with banks (green line).
Observe that non-banks write much riskier loans than banks and are suffering significantly higher arrears. In the second chart we only compare non-bank "prime loans" with banks' "prime" home loans. During the good times, the non-banks' prime arrears rates look similar to the banks' prime rates. But during difficult periods, such as right now, there is a huge structural break in arrears with non-bank delinquencies spiking up way above bank arrears.
This demonstrates that even when non-banks claim they are writing prime loans of similar quality to the banks, the truth is they are still lending to much riskier borrowers (ie, folks tend to like to pretend non-bank resi lenders are as prudent as banks, which is just not true). It also reflects the fact non-banks are unregulated whereas the banks are subject to intense APRA supervision that ultimately makes them much more conservative lenders. Readers may recall that you can only get these insights using Coolabah's hedonic compositional-adjustment technology for RMBS arrears analysis, which we pioneered here. You can see individual lenders arrears in the charts below.
As a final comment, the slide below summarises our proprietary analysis of the banks' pass-through of RBA rate hikes to new and existing home loans in both variable-rate and fixed-rate formats. The 85% pass-through this cycle has been very different to the prior three cycles in which banks typically passed-through more than 100% of the RBA's hikes.
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Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha Managers” based on his risk-adjusted performance throughout his career across. He previously worked for Goldman Sachs in London and Sydney, the Reserve Bank of Australia, and founded the award‐winning research/investment group, Rismark. He has regularly advised governments, developing unique policy proposals. Chris graduated with the University Medal (Economics & Finance) from Sydney University. He studied in the PhD program at Cambridge University in 2002/03, leaving to set up his funds business.
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Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...
Expertise
Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...
Expertise
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