Emerging Reporting Season Themes

By Roger Montgomery | More Articles by Roger Montgomery

One early theme that has emerged is the deterioration in future conditions for consumers as expressed by the Commonwealth Bank of Australia (ASX:CBA), AGL Energy (ASX:AGL) and Mirvac Group (ASX:MGR) results. Having mentioned it yesterday on the ABC’s NSW Statewide Drive program with Fiona Wyllie, it makes sense to discuss it here.

The CBA’s Matt Comyn reported slowing revenue growth with home loan growth falling to less than 2 per cent per annum. For readers of the blog this will not be surprising and it follows from the changes made by APRA following David Murray’s financial system enquiry and from the more recent Royal Commission.

Comyn reinforced the message that we took from Genworth’s result, which revealed delinquencies rising in every state. Comyn warned investors to expect arrears to rise as more borrowers moved from interest-only loans onto much more expensive Principal & Interest (P&I) mortgages.

The comment also confirms that the banks may not be able to negotiate with the regulator to have interest-only loans being refinanced classified as anything other than a “new” mortgage and therefore capped at 30 per cent of all new mortgages written.

The Royal Commission has probably also meant that any hopes the banks had of recovering pressure on margins in new/refinanced loans from the ‘back book’ of existing mortgages is without merit. Delinquencies would rise perhaps even faster if rates are raised further on existing mortgages.

Importantly CBA noted that personal loan and credit card arrears have been rising significantly since the start of the year but it is home loan arrears that are trending higher.

Given credit conditions may tighten further the implications for retailing, for example, is not great.

Reinforcing this message was the results from Mirvac. The company reported results that were in-line with expectations, but it was the 2019 guidance that surprised and disappointed the market. 2019 residential sales are being guided by the company to be substantially lower than last year at 2,500 versus 3,277 in FY2018.  That’s a 24 per cent volume decline.

Combining the above with the previously-reported rising number of Melbourne developers falling into the hands of administrators, and AGL’s reporting of a 22 per cent jump in bad and doubtful debts (people unable to pay their utilities bill) we can see less work for building contractors such as chippies and plumbers in the year ahead and weaker consumer activity overall.

We will of course keep you updated as the reporting season progresses.

Ps:  It seems Moody’s have also cottoned on to our thesis published and updated regularly over the last year or so;


Mortgage delinquencies will increase in Australia over the next two years as a record number of interest-only (IO) mortgages convert to  principal and interest (P&I) loans, a credit negative for Australian residential mortgage-backed securities (RMBS), Moody’s Investors Service says in report.

– When IO home loans convert to P&I loans, borrowers have to make higher monthly repayments, and this ’payment shock’ can lead to mortgage delinquencies and makes interest-only loans riskier than P&I loans

– Moody’s data shows that the 90 days past due delinquency rate for mortgages that have converted to P&I from IO is 0.94%, double that of IO loans that have not yet converted and 0.24 percentage points higher than all securitized mortgages

– Refinancing interest-only mortgages is also becoming more difficult, which will in itself contribute to an increase in mortgage delinquencies

– IO loans accounted for more than 40% of all mortgages originated by banks for much of 2014 and 2015, with this figure peaking at 46% in June 2015.

– At current mortgage interest rates, monthly repayments on loans that convert to P&I from IO will increase by around 30%, which can lead to delinquencies.

– With RMBS, IO loans accounted for around 32% of all loans in such deals on average as of November 2017. However, on an individual deal basis, the share of IO loans ranges from 0% to 50%Therefore, the degree to which individual deals will be exposed to potential delinquencies as loans convert to P&I from IO will depend on each deals’ exposure to IO loans and their IO period maturity profile.

Addendum 13 August 2018

UBS reported the following (with implications for furniture retailers and others):

– Tighter credit thesis playing out: home loans drop 8.4% y/y, worst since Apr-16

Our credit tightening thesis is playing out. The value of home loans (ex refinancing) dropped by 1.2% m/m in Jun-18, to the lowest level since Aug-16; and slid by 8.4% y/y, the largest fall since Apr-16. The weakness is still driven by investors (-2.7% m/m, -18.1% y/y), but owner-occupiers are also showing the first sign of weakness by just turning negative (-0.2% m/m, -0.1% y/y).

– Lead indicators for renovations suddenly slump; activity about to roll over

Over the last year credit tightened & home prices fell, but only recently is this negatively spilling over to renovations. A broad retracement in lead indicators of renovations suggest activity is about to roll over. 1) Total (new + established) home sales fell 8-10% y/y to the ~lowest level in 20 years; and 2) declining listings suggest ongoing weakness in sales ahead; 3) owner-occupier loans for alterations & additions slumped ~20% y/y (contrasting the solid up trend in recent years); 4) which suggests further weakness in A&A building approvals, which flipped from a trend of ~+10% y/y in prior months, to -9% in June. However, the negative consumption impact is yet to be seen with household goods volumes still up a strong 3-4% y/y, albeit will likely happen with a lag.

– Implications: renovations cycle is turning negative as falling house prices bite

Looking ahead, we still expect credit tightening to see home loans drop 20%, with little chance of a rebound given already record low rates. This will see credit growth ~halve in coming years. But the ‘new news’ is the negative spill over to renovations; with a retracement in approvals, loans & sales. Nominal renovations are 2.0% of GDP, & grew a strong 5-15% y/y during the house price boom years from 2014-2017. But, as house prices slowed, renovations also moderated; & we are making an early & non-consensus call A&A are likely to turn negative ahead. Hence, while new home building approvals have been stronger than expected, total dwelling activity is set to keep falling modestly.

Roger Montgomery

About Roger Montgomery

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com. Alan Kohler has referred to Roger as "one of the nations smartest and most successful value investors".

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