An increase in mortgage arrears in the first half of this year was revealed this week in the interim reporting season for three of the big four banks. The trend could damage the banks' blue-chip mortgage books.
The reporting season showed the big four banks earned a record $12 billion cash profit, up 16 per cent on the same time last year. The sector is on track to top at least $24bn for the full year.
The earnings of ANZ Bank, Westpac and National Australia Bank showed bad debts were still falling while costs were under control as credit growth was expected to to remain subdued. Commonwealth Bank has a June balance date but will release a quarterly trading update on Wednesday.
The rise in mortgages in arrears could be politically sensitive, especially as the bank bosses warned the situation was likely to worsen.
ANZ revealed on Tuesday there had been a 12.6 per cent increase in the value of loans considered to be 90 days in arrears. There are now $1bn worth of mortgages in arrears, with a sharp spike in the number of troubled loans in Queensland.
The trend emerged before January's floods and cyclone. At Westpac, the trend was stronger as the number of 30 and 90-day home loan arrears jumped to the highest level since December 2008. Loans at least 90 days behind totalled $1.46bn - up 35 per cent since September.
The increase resulted in a small, $31 million, loss on the mortgages. The rise in mortgage arrears was acknowledged by Westpac's Gail Kelly and ANZ's Mike Smith, but both said it was minor.
At NAB, the arrears rate was flat as a result of conservative lending during the crisis and a decision not to target the first home buyer market, chief executive Cameron Clyne said.
"I don't anticipate that we are going to see that. The mortgages that we are writing are already at a low loan-to-valuation ratios.
"I can't draw conclusions as to why it might be happening at other organisations, but we are not really present in the first home buyer market and we are comfortable with our delinquencies and we don't anticipate that it will be an issue going forward."
Mrs Kelly said the pain emerging in the household sector was the next step in the business cycle after the global financial crisis.
Historical trends, she said, showed that homeowners typically struck trouble two years after taking on a loan. However, the arrears pick-up was not a sign that Westpac wrote loans it should not have during the crisis.
A sharp spike in households facing mortgage stress could prove politically sensitive for a Gillard government already battling a carbon tax backlash from voters fearful it will drive up energy prices.
The arrears trend was revealed as Wayne Swan put the finishing touches to a budget that for the first time in years will not include direct tax cuts for households.
Consumers and the government face the prospect of higher interest rates after the Reserve Bank flagged this week that inflation was beginning to track higher - a clear indication a rise rise will be contemplated soon.
KPMG banking head Michelle Hinchliffe said the mortgage books of the major banks could face greater pressure, especially as rates started to rise.
"It's not a surprise that there has been an arrears pick up, if you look at what has happened since the crisis," she said. It has played out as you would expect. "I don't think it is going to alarm the banks greatly, but it does highlight that there's some stress across the portfolios.
"I think, looking forward, there are some pressure points. We have a tight budget coming up, and with an increase in the cash rate, that will create further pressure."Ms Hinchliffe said a positive for the banks was that the losses on the mortgages were contained.
"The banks were keen to show that the flow-through to actual provisions was small," she said. "That shows that the loans must be reasonably well-secured. Even if arrears keep going up, the properties are well-secured by the banks."
UBS analysts said the sharp rise in arrears was an "ominous lead indicator for the domestic economy" and Cityindex chief market analyst Peter Esho said this week's figures suggested mortgage stress was rising.
UBS analyst Jonathan Mott said the arrears were heavily related to first home owners who piled into housing on the back of the government's incentive scheme after the global crisis.
"This sharp rise is an ominous lead indicator for the domestic economy," Mr Mott said, adding the rise was the most surprising aspect of ANZ's first-half result.
The Reserve Bank raised rates by 25 basis points seven times from October 2009 to November 2010, which along with larger rises by the banks and rising inflation on household essentials has put borrowers under pressure.
AMP chief economist Shane Oliver said the RBA "did the right thing" leaving interest rates on hold this week at 4.75 per cent, but acknowledged it could raise rates in August.
The RBA's monetary policy statement yesterday increased its inflation forecast, citing further tightening of the labour market and a likely pick-up in the mining sector as key inflationary risks.
Rising rates spell weaker housing growth for the big banks and Mr Mott tipped housing credit to drop below 5 per cent. "The combination of household budget stress driven by increases in interest rates and household utility bills, the prospect of further interest rate increases, softness in house prices and weak clearance rates, is likely to weigh further on household credit formation," he said.