I’ve just returned from an overnight trip to Dublin. It was the first time I’ve been to Dublin and, as you would expect, it was raining.
Admittedly, it has been raining in the UK as well. I guess that’s just what you expect in summer in this part of the world.
Rain aside, I had some time to burn in Dublin during the day. I had a business meeting later in the afternoon. But until then — as I’d arrived at about 10:00am — I had the day to look around.
I took in a few sights — Dublin Castle, the Ha’penny Bridge, and Facebook — you know…all the historical sites…
But, of course, when you’ve only got one day in Dublin, there’s really only one place to go. That’s the Guinness Brewery. So I did.
The Guinness Storehouse, as it’s called, is the brewery tour/museum that sits amid what I call ‘Guinness City’. My Hailo driver on the way in told me that Guinness owned around 60 acres on the site next to the river. I haven’t fact checked him on that — I’ll take his word for it for now.
There are factories, the brewery, houses, a swimming pool, and a hospital — all built over 100 years ago for the workers of Guinness. It really is an impressive operation.
In the Storehouse tour, though, you get to learn all about the way they make Guinness. Thankfully, after a long self-guided walking tour, you get two free Guinness drinks at the Gravity sky bar overlooking the whole city.
Anyway, while on the self-guided tour, I came across a flow chart brewer’s use in the beer making process. It’s one of the most complex flow charts I’ve ever seen. When I first saw it, it shocked me. Beer is far more complicated to make than I first thought — or at least Guinness is, anyway.
The Guinness beer making process
Source: Sam Volkering
Click to enlarge
The longer I looked at it, though, the more I felt like I’d seen something like this before. I felt that I’d seen an incredibly complex chart like this in another industry…
And then it clicked. This was strangely similar to a chart I’d seen in the recent Commonwealth Bank [ASX:CBA] Basel III disclosure. When I got back to my hotel, I flipped back through the ASX release and, lo and behold, there it was.
Source: CBA Annual Report
Click to enlarge
The CBA chart is their structure for risk governance. One look at the CBA or Guinness chart is enough to confuse your humble editor.
I can understand that, in the case of making Guinness, there are ‘Master Brewers’ that know the process down pat. However, I can’t help but think that, in a business like CBA, all those levels, people and departments handling risk is nothing short of overkill. In fact it concerns me.
My concern with risk in the big banks isn’t isolated to their complex risk handling flow charts, though. My biggest worry is the level of residential mortgage risk that exists.
I’m of the firm opinion that the Aussie property market is hugely overvalued. Households are taking on incredible amounts of debt to pay for properties that are on the verge of a massive price collapse. The trigger will be a rise in rates as the banks’ cost of funding rises, households become too risky, and the apartment market begins to fully collapse.
Worst of all is that this looming property crash is coming now.
All signs point to a nasty ending
You only need to take a detailed look through the banks’ latest Basel III disclosures to see some of the risks they’re carrying. Now I might add these risks aren’t enough to cripple the Aussie banks. A property crisis isn’t going to see our banks fail.
But that’s little consolation for the millions of households whose properties could halve in value — seemingly overnight.
For example, look at ANZ’s Basel III Pillar 3 disclosure. It shows that the value of past due residential mortgage loans (greater than 90 days) is $1.992 billion.
Those figures are for the end of the June quarter 2016. Wind back the clock just six months earlier and the figure for the December 2015 quarter was $1.592 billion.
That’s an increase of $400 million worth of residential mortgages now past due 90 days.
Then there’s Westpac’s Basel III disclosure. Their residential mortgages, ‘terms past 90 days not impaired,’ currently sit at $2.487 billion. Wind back to the end of the June quarter 2015 and the figure was at $1.789 billion.
That’s a $698 million increase in the last year.
Finally there’s CBA (NAB haven’t released theirs yet).
At 30 June the total home loans past due greater than 90 days was $1.899 billion. Six months ago, at the end of the December quarter, it was $1.587 billion.
CBA has also seen a rise of $312 million in past due residential mortgages.
That means (not including NAB or any of the smaller lenders) all three currently have $6.378 billion in residential mortgages past due greater than 90 days.
Add in NAB, and all the other lending institutions in the country, and that figure has to get close to, if not exceed, $10 billion.
And within the last year, just those three have seen the figures increase by $1.410 billion.
These amounts might not cripple banks. But that’s still $1.410 billion of money that sits with households that can’t pay their mortgages. Let’s also not forget that this is happening in an environment with historically low interest rates — and an overinflated property market.
The CBA freely admits this is a growing problem, too. In their Annual Report they highlight:
‘Loan impairment expense increased 27% on the prior year to $1,256 million. The increase was driven by:
- An increase in Retail Banking Services as a result of higher home loan arrears and losses, predominately from deterioration in mining towns, and higher personal loan arrears.’
They also highlight other factors, including rises in Institutional Banking and collective provisions. But it’s clear that there is a rise in the number of households in mortgage arrears.
Now, before you go and say, ‘Well, $10 billion isn’t much in the scheme of things,’ let me say this. It is for the people that carry that $10 billion in loans. And while it’s $10 billion now, within a year it could be $20 billion.
If rates rise — or even if inflation rises to push up the cost of living — then $20 billion turns into $40 billion in the blink of an eye. I’m not saying the property bubble is bursting today, but the signs are there to say that it’s coming.
This isn’t a problem that’s about to go away. This trend is a huge issue. These are the early stages of a major property crisis in Australia. Some people refuse to admit what’s staring them in the face. But I’m here to tell you it’s all about to go belly-up.