CANBERRA: Fitch Ratings expects major Australian bank profit growth to slow as the housing market cools and the economy transitions from the mining investment boom towards more subdued growth.
The global ratings agency said the softer outlook was due to likely weakening conditions in the coming financial year as the tail end of the mining boom weighs on economic expansion while housing growth, which the Reserve Bank wanted to support the economy, was likely to taper off, particularly in Melbourne and Sydney.
The Big Four Australian banks, which this year lifted annual profits by 7.6 per cent to a total $31 billion, are expected to see the impact of the softer operating environment and slower growth prospects in their 2016 financial year results.
A recent KPMG study showed the Big Four banks’ return on equity fell from 15.5 per cent to 15 per cent over the last fiscal period and forecast the downwards trend was likely to continue as the banks increased their capital levels to meet regulatory demands.
Meanwhile, the Big Four have shed almost 3000 jobs in the past six months in a bid to maintain profitability as revenue growth slows. Fitch said the banks’ net interest margins have been challenged by fierce competition on assets, while funding costs had increased.
The agency also warned the major lenders might be forced to log higher impairment charges and more technology spending, particularly when expense management faced greater scrutiny.
“Fitch believes that cost efficiency is likely to come under pressure as all banks continue to invest in technology which should support cost efficiency in the long-term and offset some disruptive competition pressure,” the agency said.
“However, these additional expenses will need to be absorbed at a time when revenue growth is slowing. Hence, we expect that the major banks will focus on tighter, non-technology related cost management.”
Fitch said it expected loan impairment charges to rise from current cyclically low levels, reflecting the softer economy and pressures in some industries and regions, such as mining dependent areas of Queensland and Western Australia. However, the ratings agency said this would be contained unless the banks’ main markets experienced a severe economic shock or interest rates were to increase sharply.
CLSA banking analyst Brian Johnson today said the banks had sharply de-rated since their share price peak in April this year, thanks in part to the fear that weak commodity prices would trigger an increase in loan losses as foreclosures rise.
Mr Johnson said a weaker China equity market was also raising fears of a decline in the Australian dollar and house prices, which was keeping bank stocks under pressure. Over the September quarter ANZ and Commonwealth Bank shares declined the most as international investors sold down their holdings, Mr Johnson said.
Australian bank earnings were vulnerable to rising loan losses, while high dividend payout ratios were vulnerable to rising capital requirements and the US dollar appreciating, he said.
The big banks have made out-of-cycle rate hikes to their mortgage loans in the past month, with many of the regional and smaller lenders following in their footsteps, which Fitch said would help offset the pressure on the margins.