Bad debts starting to rise for Australian banks

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Australian banks are not as safe as they were once touted to be.

They are still hovering at very low levels but Australian banks are starting to see their home loan mortgage arrears increase.

Despite falling interest rates and an improving property market, more customers are getting into trouble with their home loans.

Westpac (ASX: WBC) reported an increase in mortgage arrears in the June quarter, which has left the bank holding more repossessed properties.

The proportion of mortgages more than 90 days behind on their repayment schedule rose to 0.9%, up from the previous 0.82% in the March quarter, while the number of residential properties Westpac repossessed rose from 482 to 550.

Bad debts rise for credit cards and personal loans

Bad debts also increased across credit cards and personal loans, although most of the debt problems seemed to be concentrated in states such as Queensland and Western Australia that have suffered from the mining downturn.

Trading updates from ANZ Bank (ASX: ANZ) and National Australia Bank (ASX: NAB) also revealed slight increases in mortgage arrears during the June quarter, although all of the banks are expecting the renewed strength in the housing market to eventually flow through to their arrears with a lag.

For many years now housing arrears have kept falling, improving the bank’s profits and the quality of their loan books.

Having that situation turn around – even from a very low base – is worth keeping an eye on.

Problems arise despite benign unemployment and low rates

While the arrears rates are still minimal, they are happening at a time when unemployment is still quite low at around 5.2% and variable interest rates have been falling.

Overall, the changes in arrears were hardly noticeable for Westpac, with its loss rate for mortgages unchanged at 0.02% and its total provision for bad debts including riskier business loans stayed steady at 0.56% of gross loans.

Half of Australia hit by banking scandals

The slight worsening in loan arrears coincided with an alarming Melbourne University study that found that more than half of Australia’s population has lost money due to misconduct or inappropriate actions by banks and financial planning groups.

The survey of 1,029 consumers found a trust deficit between consumers and institutions with the cost over the past five years extrapolated to be an amazing $201 billion.

That is much worse than the sort of estimates that were discovered in last year’s banking royal commission which put the total of compensation due as around $10 billion.

While the staggering survey estimate of $201 billion should be taken with a grain of salt, it would not be a total surprise if the one in two figure turns out to be right.

In evidence to the Royal Commission, ANZ chief executive officer Shayne Elliott estimated that around two million Australians were being compensated by his bank alone.

If we add to that the compensation payments from the other banks and from the big fund managers such as AMP (ASX: AMP), it would not be a surprise if half of the population was being compensated for poor behaviour by their financial institutions.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.