Bank profits under pressure in 2015

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by Martin North at Digital Finance Analytics

Fitch Ratings 2015 Outlook: Australian Banks report has a stable sector outlook for Australian banks in 2015, reflecting what should be a relatively steady operating environment despite a likely modest decline in real GDP growth and an elevated unemployment rate. These factors should in turn result in modestly weaker asset quality and an increase in impairment charges, which are likely to be offset by strengthened balance sheets and strong profitability.

A significant slowdown in China is the biggest risk to the outlook, given it is Australia’s largest trading partner, but such a slowdown is not Fitch’s base case. A relaxation of underwriting standards to improve growth also looms as a risk, although this appears less likely following the announcement in December 2014 of regulatory reviews of potentially higher-risk lending.

Housing credit growth is likely to slow in 2015, in part because of the regulatory review but also due to high household indebtedness and slower house price growth. Fitch expects household indebtedness to stabilise in 2015, with an easing in wage rises and as unemployment remains high.

Nevertheless, competition for loans will likely remain intense, placing some pressure on net interest margins. This and an expected rise in impairment charges will likely mean lower profit growth in 2015. Offsetting this, capital positions are likely to be strengthened, in part to address potential new requirements stemming from the 2014 Financial Services Inquiry (FSI) recommendations, while the shift towards more stable funding sources will probably continue.

Although banks may act on some FSI recommendations during 2015, many of the measures requiring government action, including legislation, are unlikely to be implemented before the end of the year. Fitch expects implementation timeframes to be set such that meeting the new requirements should not be overly onerous for banks

 

Comments

  1. Banks have people locked into variable rate loans for up to 30 years – Collectively they could all raise rates on their captive customer base to maintain profitability. They’ve shafted savers well ahead of schedule (per RBA) so the other side of the coin is borrowers.

      • True Pete, they don’t have to… but to maintain profit margins the banks could increase this margin if/when loan volumes fall.

    • The downside to this Andy! would be a substantial increase in customer default rates, impact on property prices and a likely substantial reduction in new borrowings.

      That also assumes that the banks do not enter a period of price competition.

      Banks do well when interest rates are falling as it’s easier to maintain margins and customers have extra capacity – when the cycle turns they face substantial headwinds.

      • From a bank as a business perspective, I absolutely agree on those impacts & weigh ups. Personally, I do not view these as downsides though! The prospect of cycle changing headwinds are very exciting.

  2. Hi,
    Is someone able to download and send me a copy of the full report by Fitch Ratings? I am not a member and therefore cannot access it.

    Thanks!