This article is from the Australian Property Journal archive
AUSTRALIA’S four major banks are facing further pressure to their operating profit in the next 12 months due to weaker apartment-building sectors and mining conditions, according to Fitch Ratings.
The four major banks – Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking (WBC) – posted the first drop in their combined pre-tax profit in eight years in the financial year 2016 (FY16). Pre-tax profit fell to AUD41bn (USD32bn), 7% lower than FY15.
Profit was hit by a 36% increase in loan-impairment charges – albeit from a cyclical low – which reflected problems in the resources sector and its knock-on effects for businesses and households in mining areas.
Fitch said it expects Australia’s banks to face a weak operating environment again in FY17 as property developers start experiencing settlement risk.
“Net interest margins are likely to be squeezed further by higher wholesale funding costs, and tougher loan and deposit competition. Falling mining investment and weaker employment in the resources sector will continue to weigh on the performance of banks’ mining sector exposure, despite the recovery of some commodity prices this year.
“Property developers may also soon start experiencing problems settling agreed apartment sales, which may feed through to banks over the next 18 months. The decision by the four major banks earlier this year to stop lending to non-resident property investors means the latter are now likely to find it harder to source finance to complete agreed purchases, and may back out of deals,” Fitch warns.
Having said that, Fitch said Australian banks are still likely to remain highly profitable compared with their international peers, and are in a strong position to cope with capital pressures that might result from upcoming regulatory changes.
“All banks have issued additional common equity in the last 18 months to boost capital buffers in response to regulatory changes. Even with a drop in profitability they have the flexibility to meet increases in capital requirements that might come with the introduction of Basel IV or changes to the Australian Prudential Regulation Authority’s guidelines.
“Moreover, their direct exposure to the mining and property development sectors is relatively small and manageable.
“Asset quality is likely to remain relatively strong in the absence of broader problems in the mortgage market, which dominates banks’ balance sheets. High underemployment appears to be creating stress for some mortgage borrowers – arrears have risen over the last year, albeit to a still-low 1.14% of total mortgages.
“Moreover, high debt levels make households vulnerable to a rise in interest rates or further deterioration in the labour market. However, Fitch does not expect the Reserve Bank of Australia to start raising its cash rate until 2018, and the unemployment rate is likely to remain stable.
“Improvements in banks’ underwriting standards since mid-2015 should also provide a cushion, especially since the sharp increase in property prices since then has boosted the equity of earlier home buyers,” Fitch said.
Australian Property Journal