On the left-hand side we can see the tailwinds. Our customers are in a strong position and our portfolio has continued to shift towards lower risk exposures. And with the economic risks of COVID-19 receding, the overlay we’d set aside is no longer required.
In total, these tailwinds amount to a reduction in provision balance of $888 million.
The right-hand side shows how we’ve considered possible future headwinds. We’ve made allowance for increased risks associated with rising inflation and geopolitical tensions. And we’ve also applied a new overlay for the possible impact of interest rate increases on our retail and commercial customers.
Taken together, our allowances for these future headwinds amount to an increase in provision balance of $948 million (before foreign exchange affects).
Yet – and this demonstrates current conditions - household balance sheets are the best they have been for 15 years. This is largely a product of prudent measures taken by customers during COVID, the impact of government support and the effective response from all levels of government in Australia and New Zealand.
In aggregate, Australians and New Zealanders have never been healthier, wealthier or more employed.
During the pandemic households did exactly what you would expect a corporate treasurer to do: they shored up their savings; they paid down their most expensive debt; they prepared for the worst.
We see this echoed in the overall risk of our portfolio. Our group long run loss rate has declined from 0.35 per cent at September 2016 to 0.19 per cent at September 2022. We see this echoed in the overall risk of our portfolio. Our group long run loss rate has declined from 0.35 per cent at September 2016 to 0.19 per cent at September 2022. When we look at risk in our retail bank, the incidence of customers behind on their home loan repayments has reduced 50 per cent from pre-COVID levels.
Meanwhile, home loan offsets are up about 44 per cent compared with pre-COVID levels and deposits overall are up 27 per cent per customer.
But rising rates and the cost of living will have an impact and it is particularly an issue for first time homeowners, those who borrowed above 80 per cent of their house price and are only just starting to build up their equity.
From ANZ’s own perspective – and particularly given the uncertainty ahead - we are continuing the systematic de-risking of the bank across our portfolios, notably with the formal separation of our Pensions & Investments business a few weeks ago, following the sale to Insignia.
We are the only one of the major Australian banks to have removed that risk from the balance sheet and P&L. When combined with the recent completion of our Wealth remediation program, the sale of our $1 billion margin lending to business to Bendigo and Adelaide Bank and the further strengthening of our institutional portfolio, we are a much safer bank than we were a few years ago.
And while we have seen a slight uptick in 30-day past dues in New Zealand - still well below pre-covid levels - we have not yet seen any deterioration in Australia but stand ready if conditions worsen.
Our Australian mortgage book is $283 billion but less than 1.5 per cent of that has been on our books for under two years, has a Loan-to-Valuation ratio of greater than 80 per cent without mortgage insurance and less than three months of savings buffer.
Meanwhile, it can be overlooked, but wages are also rising. When we assess a loan we assume a wage stays the same. It doesn’t - and we are finally starting to see strong wage inflation flow through the system.
We can track the salaries of Australian Home Loan customers who have been with ANZ over the past year and, on average, their income has increased 5.5 per cent. The New Zealand experience is the same with an increase of 6.6 per cent - roughly the same as inflation.
To look more specifically at our coverage, we remain very well provisioned going into the next period. The quality of our book together with the operating environment is reflected in lower new and increased provision charges which were fully offset by writebacks and recoveries.
While the total provision balance was marginally higher, the composition has evolved to ensure it remains appropriate for a volatile environment with a collective provision balance of $3.85 billion. To put this into perspective, this is $2.1 billion above our base case modelled outcome.
Even more importantly our balance is over $600 million above the conservative downside scenario which, in the case of our portfolio, for example, is stressed tested for – and I emphasise this is not our assumption - property price falls of 28 per cent from their peak in the June quarter, unemployment rising to 6.4 per cent and the Australian GDP contracting.
Meanwhile, over the past year a proactive program of work in our Lending Services/workout area resulted in the reduction of over 500 customers, equating to around a 40 per cent reduction in the book.
We have been simplifying, de-risking and buffering ANZ against a more uncertain world for several years now and this ongoing work underpins the confidence we have in our strength in this result.
Kevin Corbally is Chief Risk Officer at ANZ.