Genworth Australia Downgraded

From Australian Broker.

One of Australia’s leading providers of lenders mortgage insurance (LMI), Genworth Financial Mortgage Australia, has had its ratings revised from stable to negative.

S&P Global Ratings announced the move yesterday (20 March), 11 days after the company announced the loss of a major customer. The unnamed partner – a second tier bank – opted to terminate the agreement upon the expiry of its contract on 8 April.

“The outlook revision to negative reflects our expectations of a possible weakening of Genworth Australia’s competitive position, and subsequent operating performance, as a consequence of the continued decline in the insurer’s market position,” analysts wrote.

Over the past three years, Genworth has lost two large clients with the most recent loss accounting for around 14% of its gross written premium during the 2016 fiscal year (ending 31 December).

“As a result, we expect Genworth Australia’s full-year 2017 gross written premium to contract further, which is below our previous expectation of modest premium growth.”

This follows a larger than anticipated decline in gross written premium of around 25% during the 2016 fiscal year. While the company remains the largest provider of LMI insurance in the market, these declines have put pressure on its competitiveness, market position and earnings resilience, analysts said.

“We recognise the decline in gross written premium has been partially driven by industry-wide contraction reflecting regulatory measures to curb investor lending growth and reduced lender risk-appetite for high loan-to-value ratio loans.”

The new negative outlook means S&P has a one-in-three chance of further lowering Genworth’s ratings over the next two years. This would occur if there is a material deterioration in the firm’s competitive position or operating performance, or there is evidence of excessive risk taking through inadequate pricing or looser underwriting standards.

S&P could revise the outlook to stable over the next two years if Genworth’s competitive positions stabilises and its operating performance is sound while its underwriting discipline and pricing remains solid.

Australian mortgage arrears up 25%: S&P

From InvestorDaily.

S&P Global Ratings has found prime home loan arrears for the third quarter of 2016 were 25 per cent higher than the same quarter last year, owing to lower wage growth, higher indebtedness and underemployment.

According to the ratings agency, 1.14 per cent of mortgages underlying Australia’s prime residential mortgage-backed securities (RMBS) transactions were more than 30 days in arrears in Q3 2016, compared to the same period in 2015 and 2014.

The ratings agency found that lower wage growth and higher household indebtedness were “undoubtedly contributing to mortgage stress for some borrowers, in addition to declining growth in full-time employment pushing some borrowers into part-time employment” (known as ‘underemployment’).

The mining downturn was also found to be a large contributing factor to the rise, with arrears most evident in Western Australia and Queensland.

For example, arrears fell in all states and territories during Q3 except in WA, where arrears breached the 2 per cent threshold to a national high of 2.03 per cent.

South Australia also had high arrears, at 1.55 per cent, followed by the Northern Territory (1.48 per cent).

Despite this, seven of Australia’s 10 worst-performing postcodes in the third quarter were in Queensland, up from Q2, when five of the state’s postcodes were in the top 10.

This was partly attributed to the “spill-over effect” from the downturn in mining investment in areas with a greater exposure to the resources sector.

While mortgage arrears in Q3 were higher this year, the ratings agency noted that they remain below their peak of 1.69 per cent and decade-long average of 1.25 per cent.

Further, comparing the figures quarter-on-quarter, the agency revealed that the percentage of home loans more than 30 days in arrears had declined from the second quarter of 2016 (when arrears were around 1.19 per cent), as expected.

S&P added that, while unemployment levels are relatively stable and interest rates low, the agency expects that “most of the borrowers whose loans underlie RMBS transactions [would] stay on top of their mortgage repayments”.

“We expect arrears to decline during Q3 before rising again … as Christmas approaches,” it added.

Measuring the weighted-average arrears more than 30 days past due on residential mortgage loans in both publicly and privately rated Australian RMBS transactions, S&P found the total value of loans (including non-capital market issuance) to be $134.28 billion in Q3.

Housing risk a ‘credit negative’ for banks

As reported in InvestorDaily, high residential property prices and private debt levels have driven S&P Global Ratings to revise the credit outlooks for 25 Australian banks to ‘negative’.

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The credit ratings agency said that economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months.

“Our base-case scenario remains that the growth in property prices and private sector debt will moderate and remain at relatively low levels in the next two years,” S&P said.

“However, in our alternative case, we assess that there is a one in three chance that the strong growth trend will resume and economic balances will continue to build, which in our view would increase the risks that a sharp correction in property prices could occur.

“In that event, credit losses incurred by all financial institutions operating in Australia would be significantly greater.”

If risks in the economy continue to grow – other things equal – the ratings agency expects to lower its assessment of the stand-alone credit profiles (SACPs) of all financial institutions operating in Australia.

S&P said it is revising its rating outlooks on 25 financial institutions in Australia to negative as it now sees a one in three chance that it would lower these ratings in the next two years. Outlooks on three Australian banks have also been revised from ‘positive’ to ‘developing’ for the same reason.

“The rating actions reflect S&P Global Ratings’ view that the trend in economic risks facing financial institutions operating in Australia has become negative,” S&P said.

The agency pointed to strong growth in private sector debt (to about 139 per cent of GDP in June 2016 from 118 per cent in 2012, or an annual average increase of 5.2 percentage points) coupled with an increase in property prices nationally (average inflation-adjusted increase for the past four years was 5.3 per cent nationally) as the key drivers of a potential increase in “imbalances” in the Australian economy.

“Consequently, we believe the risks of a sharp correction in property prices could increase and if that were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater; with about two-thirds of banks’ lending assets secured by residential home loans,” S&P said.

“The impact of such a scenario on financial institutions would be amplified by the Australian economy’s external weaknesses, in particular its persistent current account deficits and high level of external debt.”

However, S&P’s base case considers that the growth in private sector debt and property prices will moderate and remain relatively low in the next two years.

Increasing apartment supply in Sydney and Melbourne, regulatory pressures on lending practices and capital, and recent trends (including declining sales volumes in the secondary market) should help moderate the growth in property prices and household debt, according to the ratings agency.

“Nevertheless, in our alternative case, we consider that there is a one in three chance that the strong growth trend will resume within the next year, because in our view several other important factors that have supported the past trend are likely to persist,” S&P said.

“[These include] low interest rates, a relatively benign economic outlook, and an imbalance between housing demand and supply; in addition, Australian banks could possibly target higher lending volumes to offset pressures on their earnings growth.”