Growing macroeconomic risks appear manageable for Australia's major banks in the absence of an economic shock, which could result from a hard-landing in China, Fitch Rating says in an Australia bank report published today. However, a hard-landing is not Fitch's base-case scenario and the agency affirmed the ratings of all four major Australian banks at AA- with a Stable Outlook on 11 May 2016.
In the report, “Peer Review: Australian Major Banks – Rising Macroeconomic Risk May Challenge Financial Profiles”, Fitch says strong company profiles are driving the Viability Ratings of the major banks, being Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation. The profiles reflect stable, simple and transparent business models and a leading market-share in a number of products across Australia and New Zealand. This provides the banks with the pricing power to ensure strong and consistent profitability while maintaining a fairly conservative risk appetite relative to international peers.
Fitch believes low interest rates and the country's tax policies probably contributed to Australia's macroeconomic risks. These include rising household debt and strong house price growth that has exceeded wage-growth for a sustained period and continues to place pressure on housing affordability.
Pockets of Australia's property market may encounter potential oversupply of new residential housing and hurt house-prices in those areas. However, a stable labour market and historically low interest rates should limit the impact on the banks' asset-quality. Fitch expects the banks to maintain tightened underwriting criteria implemented from mid-2015 to address regulatory pressure and a more challenging operating environment. This should limit asset-quality deterioration for recently originated loans.
Some portfolios, such as resources, are likely to continue experiencing asset-quality pressure due to weak commodity prices, which Fitch does not expect to improve in the short-term. However, the banks' exposures to mining and dairy remain manageable relative to total exposures.
Fitch expects soft profit growth in 2016, mainly reflecting asset competition, low interest rates, moderate credit growth and rising impairment charges. Capitalisation is likely to continue improving over the medium-term due to regulatory capital requirements, although capital ratios may decline as minimum average risk-weightings of 25% for residential mortgages are implemented from 1 July 2016.
Funding remains a weakness relative to similarly-rated international peers, with high reliance on offshore wholesale markets. The banks are likely to focus on lengthening wholesale funding maturity profiles and reducing short-term offshore wholesale funding, while gathering more stable deposits, to prepare for the implementation of the net stable funding ratio in 2018.
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