Australian banks pass Fitch stress tests on price falls and default increases

Some rather comforting if not sobering news for the Australian property market today.

Bloomburg reported that Fitch Ratings stress tests on Australian banks & mortgage insurers had indicated that a 40 percent tumble in Australian house prices and a home loan default rate of 8 percent would be “manageable”.

The three scenarios Fitch tested are:

  1. mild stress with mortgage defaults of 2.5 percent and a 20 percent drop in home prices;
  2. medium stress with 6 percent defaults and 30 percent decline in prices; and
  3. severe stress with 8 percent defaults and a 40 percent price slump

Fitch’s analysis suggests that:

  • losses, even in the most severe scenario, are manageable.
  • banks would see a maximum A$10 billion ($9.9 billion) of losses in the third year of a severe mortgage stress scenario and mortgage insurers would lose a little more than A$7 billion.
  • banks' loan-loss reserves and pre- provision, pre-tax profits are more than adequate

The findings are the preliminary results of a stress test announced last month in response to increased institutional scrutiny on the stablility of the Australian property market.

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