Is it possible that the ASX banking sector is going to cause the next crash?
One could argue that the actions of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have already caused a bit of a downturn.
Their relaxed lending in the early 2010s saw house prices rise significantly and the subsequent royal commission put a dampener on many discretionary businesses on the ASX like Nick Scali Limited (ASX: NCK) and Flight Centre Travel Group Ltd (ASX: FLT).
But there is still concern that the over indebtedness of many Australian households could cause issues down the line. Just because Armageddon doesn't happen (or ever happens), doesn't mean the underlying situation has improved.
Just look at Westpac's mortgage delinquencies. At March 2019 its 30+ day delinquencies had increased to 1.59% from 1.44% at March 2018. The 90+ day delinquencies have gone from 0.69% at March 2018 to 0.72% at September 2018 and 0.82% at March 2019. Most banks are seeing a rising trend.
When will this trend stop? If delinquencies reaches a certain level it could be a disaster for banks' bad debts and the economy as a whole. I'm certainly not predicting another GFC, but the knock-on effect from housing can affect all areas of the economy, like we saw in the USA.
Whilst stress testing a bank is not meant to be a bank's prediction that things are going to go wrong, it can provide an insight into what might happen if things were to turn bad. Westpac's latest disclosed mortgage portfolio stress testing showed that a severe recession would send unemployment over 10% with house prices dropping by 35% and cumulative losses of around $5 billion, wiping out its profit, although Westpac would survive.
Foolish takeaway
With such large assets and liabilities, I think banks are riskier than some people think. It can take years for poor lending to show up. That's why I don't want to ever invest in ASX banks. Why take the risk when that once-in-a-generation event can happen?
