NAB‘s $200bn of risky loans

NATIONAL Australia Bank has identified almost $200bn of riskier exposures across its home lending and business books, as it braces for higher rates and rising inflation to punish its most indebted customers in the coming months.

The bank’s own analysis, released alongside its full-year results on Wednesday, pointed to $177bn of home loans that NAB wrote between mid-2019 and mid-2022, all of which had an average serviceability threshold less than 6 per cent, when rates were at rock-bottom levels. Those same thresholds should now be sitting at about 7 per cent, and will move even higher as rates rise.

Even as the broader economic outlook darkens, NAB chief executive Ross McEwan is confident Australia can avoid a recession and navigate a soft landing through next year and beyond.

“All of the numbers look like Australia will continue to grow in GDP next year, which is good, given what’s going on and is predicted to go on in the world, particularly around the UK, Europe, the US and China,” Mr McEwan said.

“So all of the big trading partners for us are slowing down, (but) we could still have growth in GDP next year and into 2024; I think that would be a good landing.”

The market can handle a cash rate of 3.6 per cent or even 4 per cent, he said.

“There will be pain, there will have to be pain, unfortunately. That’s what it’s all about, putting interest rates back up again off the emergency settings they’ve been on.

“It does create some household pain and anguish, as would other prices going up.”

NAB currently expects the cash rate to peak at 3.6 per cent by the end of 2023 and sees unemployment rising to 4.2 per cent by the same time.

The higher cash rate, which currently sits at 2.85 per cent, means borrowers who took out home loans through Covid are already facing much higher repayments and increasingly the prospect of falling into negative equity.

NAB is forecasting house prices to plunge a further 15 per cent, further pressuring borrowers who may be contemplating selling as repayments balloon. House prices had declined 5 per cent nationally by the end of September.

NAB’s cash profit jumped to $7.1bn for the 12 months ended September 30, up 8.3 per cent on the prior corresponding period, underpinned by volume momentum, the rising interest rate environment and a balanced approach to cost discipline, the lender said.

The result was in line with analyst expectations.