Article by Clancy Yeates
Photo: Nic Walker
Published in the Sydney Morning Herald
September 6th 2016
Car loan losses hit six-year high, says Fitch Ratings
Banks’ loan losses from car financing have risen to a six-year high, new figures show, as the patchy labour market and the mining slump causes more borrowers to fall behind on their payments.
Fitch Ratings says the proportion of automobile loans that suffered a loss after lenders sought to repossess the vehicle rose to 0.62 per cent in the June quarter, the highest level since the index started in 2010.
The weak labour market is being blamed for a rise in car loan losses.
Even though the loss rate is relatively low – it has risen about 10 basis points in the last year – the credit ratings agency expects higher losses for the rest of 2016.
Major banks have also confirmed that a higher share of consumer borrowers are in default in recent months, with the trend most apparent in mining areas.
However, separate figures this week showed new car sales continue to grow strongly. A record 1.178 million new cars were sold in the year to August, with sports utility vehicles accounting for 46.7 per cent of the sales, Federal Chamber of Automotive Industries figures showed.
Fitch analyst James Zanesi said the rise in loan losses was surprising, because most economic indicators suggested households were in reasonable financial shape. The unemployment rate, which bankers see as a critical influence on loan losses, has fallen to 5.7 per cent, from last year’s peak of 6.3 per cent.
Mr Zanesi said Fitch was investigating the rise in bad loans, which may reflect more borrowers being unable to get enough hours at work – known as underemployment.
Australia’s underemployment rate is about 8.5 per cent, near the highest on record, compared with 6 per cent before the global financial crisis, a sign of a labour market that is weaker than it may appear.
Analysts believe one reason for the rise in underemployment is that well-paying jobs in mining construction have been replaced with jobs in tourism and household services, which are more likely to be part-time.
“We see that underemployment in regional areas, particularly mining areas,” Mr Zanesi said.
The Fitch data is based on a $13 billion pool of loans that have been bundled up and sold to investors. The banks behind the loans include Macquarie Group, Westpac and Bank of Queensland.
Very weak wage growth also tends to push up banks’ consumer loan losses, Fitch said, after figures last month showed private sector wages growing at just 1.98 per cent in the year to June, a record low.
Households have also been taking on more debt, which can leave borrowers at greater risk of being unable to repay their loans if they lose their job. The ratio of household debt to disposable income – closely watched by economists – is at a record 186.6 per cent, Reserve Bank figures show.
While banks’ overall charges for bad debts are very low, they have been rising in recent months, eating into the sector’s profit growth.