Energy price shocks expected to hit mortgage holders
Westpac has warned that the negative effects of the Iran war will be felt on the banking giant’s upcoming first-half financial results.
In an ASX statement published on Tuesday morning, Westpac said it is increasing its capital provisions to safeguard itself against potential loan defaults.
“With the supply shock from the energy market disruption expected to result in higher inflation and higher interest rates, an expected slowing in economic growth will create a more challenging environment for some customers,” said the group.
The bank expects a 10-basis-point credit impairment charge of average gross loans in the first half.
Westpac also warned that “geopolitical uncertainty and the associated increase in market volatility” has trimmed margins in its Treasury and Markets segment. The segment is expected to deliver a net interest margin (NIM) of seven basis points in the second quarter compared to 15 basis points in the first quarter.
US president Donald Trump has moved to blockade the Strait of Hormuz after peace talks between the US and Iran failed to reach a deal.
Approximately 20% of the global oil and gas supply moves through the strait. Traffic had already been severely curtailed after joint US-Israel strikes on Iran, causing energy prices to soar across the globe.
It has led to renewed inflation fears in Australia, with Westpac anticipating three interest rate hikes from the Reserve Bank of Australia (RBA) in the coming months.
The bank expects the cost of a detached home to go up as much as 10% thanks to price inflation resulting from the war.
With banks lifting fixed and variable interest rates across the board, Australian household are expected to have their serviceability thresholds tested to the limit.
RAMS portfolio update
Westpac also provided an update on the sale of its RAMS mortgage portfolio to a consortium including Pepper Money, KKR and PIMCO.
It remains on track for completion in the second half its Westpac’s financial year.
The RAMS portfolio moved from Consumer to Group Businesses in the first half without affecting net profit after tax (NPAT)or line item composition. The upcoming first-half financial report on 5 May will include a $75 million after‑tax transaction cost.
