The big four's profit growth will be soft, says Fitch Ratings. Photo: Paul Rovere
The big banks' profit growth will be dampened further as more customers fail to repay loans, lenders compete fiercely for new business, and credit growth stays relatively soft, Fitch Ratings says in a new report.
Commonwealth Bank, Westpac, National Australia Bank and ANZ also face rising risks from record high household debt levels as a result of the housing boom, but these threats should be manageable for the lenders, the credit ratings agency says.
Despite this tougher economic backdrop, Fitch says the dominant lenders will be able to shield their bottom lines by exercising "pricing power". It maintained its AA- credit rating on the lenders.
"Fitch expects soft profit growth, with revenue increases remaining under pressure due to asset competition, low interest rates and moderate credit growth relative to historical levels," the Fitch report said on Friday.
It comes after the big four delivered combined profits of $14.8 billion in the first half, with ANZ Bank cutting its dividend while the other three kept payouts to shareholders flat.
The results showed that combined provisions for soured loans rose about 50 per cent to $834 million among the big four, according to PwC, though this was from a very low base and the jump was mainly driven by a few big corporate names, rather than an economy-wide slump in credit quality.
Credit quality may weaken further, Fitch said, pointing to the potential for further soured loans in mining, and higher risk mortgages written between 2014 and mid 2015, when banks tightened their home lending significantly.
Reflecting the views of many analysts in the market, it said ANZ Bank was the riskiest lender of the four, citing its higher exposure to large corporate lending, Asian markets, and home loans written by mortgage brokers.
Several other analysts have this week also highlighted the softer conditions facing the big four – though brokers are divided over whether bank stocks represent good value.
CLSA analyst Brian Johnson advised clients to remain "underweight" on the sector, citing slower growth in earnings per share, and the risk of dividend cuts and capital raisings.
Moody's said there was a rising risk of loan losses, saying it expected "gradual pressure" on banks' loan books from the resources sector, falling mining investment, and risks from lending to residential apartments.
Fitch also pointed to the risks in the housing market, which it said had probably been inflated by low interest rates and tax policies. House price growth that Sydney and Melbourne experienced in recent years was "unsustainable", Fitch said, and it predicted average growth of 2 per cent this year.
It said there was a risk that the apartment market – in which foreigners have played a key role – could face "pressure" after banks recently moved to curb their lending to overseas buyers.
"Pockets of Australia's property market may encounter a potential oversupply of new residential housing, which could hurt house prices in those areas," it said.
The predictions of a softer outlook for bank profits came as UBS confirmed it had hired former Westpac chief executive Gail Kelly to advise its top global managers on issues including strategy, risk and regulation.
"Gail will provide insights on strategy, regulation and risk as an active participant on specific topics at our GEB strategy meetings," UBS chief executive Sergio Ermotti said in a staff email.
Another challenge facing banks around the world is the decline in interest rates – a trend the market expects will continue after the Reserve Bank this month cut official rates to a fresh low of 1.75 per cent.
Macquarie analyst Victor German said that low interest rates were negative for bank profits because they made deposits less profitable, and because low interest rates slowed the growth in their balance sheets.
He pointed out that bank earnings grew 11 per cent a year on average between 1996 and 2007, but growth has averaged 3 per cent since 2008, when the RBA slashed borrowing costs.
Even so, Mr German argued the banks' high dividends would support share prices in the sector, predicting banks could deliver market-leading yields over the next five years.
The ASX Banks index is down 7.8 per cent since the start of the year.
