Via Moody’s:
“We changed our outlook for the broader Australian banking system to negative in early April, reflecting our view that the economic impact of coronavirus-related disruptions will strain banks’ loan performance,” says Tanya Tang, a Moody’s Analyst.
“Today’s rating actions are prompted by this change in outlook on the broader banking system.”
As a result of weakening economic activity and rising unemployment, Moody’s expects loan defaults to increase, although the ultimate impact will depend on the breadth and severity of the disruption as well as on the effectiveness of the large stimulus measures provided by the Australian government to support domestic companies and consumption.
Increasing loan-loss provisioning, record low interest rates, and strong pricing competition amidst low loan growth will hurt banks’ profitability. Moody’s consequently expects internal capital generation to weaken, especially at smaller banks, eroding their current strong buffers against loan losses.
Bank funding and liquidity conditions remain supported by the Reserve Bank of Australia’s (RBA) monetary measures, including government bond purchases and a funding facility to support credit intermediation and long-term repo activity, as well as by reduced consumption which is contributing to an increase in deposits. However, wholesale funding stability could be tested if the coronavirus outbreak persists, with wholesale funding generally more price and confidence sensitive.
Among rated Australian banks, Moody’s anticipates greater negative rating implications for those with a direct exposure to the most negatively affected sectors of the economy, and for those banks with relatively narrower financial buffers compared to expectations for their current ratings. These include, in particular, banks with relatively lower levels of core capital, compared to the forward-looking risks to their asset quality, and/or a higher exposure to wholesale funding markets. The four banks affected by today’s rating actions fall into this group.
Qudos Bank has a strong franchise amongst aviation sector employees, who comprise approximately a third of mortgage borrowers and contribute 15%
of deposits. The aviation sector has been heavily affected by the coronavirus outbreak, given extensive travel restrictions and reduced consumer demand. Extensive layoffs in the sector, and the potential for a drawn-out recovery of demand for passenger flights, expose the bank’s asset quality and earnings to meaningful pressure.MyState is less-well capitalized than many of its Baa1 rated residential mortgage-focused peers, but its asset quality, as measured by problem loans as a percentage of gross loans, is stronger at 0.2% as of fiscal year 2019. At the same time, Moody’s expects economic disruption stemming from the coronavirus to weigh on the asset quality outlook. The bank has a loan exposure concentration in Tasmania, although it has been expanding into mainland Australia through brokers. Wholesale funding comprises around 30% of total funding, but the majority is in the form of securitization, reducing the mismatch between assets and liabilities and short-term funding risk. The bank also intends to increase the share of retail deposits over the longer term.
Similarly, IMB Ltd’s core capital is weaker than the peer average at 12.6% as of December 2019, but its problem loan ratio is stronger at 0.1%. Capital flexibility remains supported by the bank’s mutual model, and by its ability to defer legacy ordinary share buybacks and dividend payments, offsetting profitability pressure. At the same time, asset quality is likely to come under pressure amid the coronavirus outbreak, while the bank has a regionally concentrated franchise in New South Wales. Wholesale funding comprises around 30% of total funding, although around two-thirds of this consists of deposits from councils, universities, government agencies and superannuation funds, that exhibit greater stability than most wholesale sources.
ME Bank’s capitalization is at the lower end of the Baa1 peergroup, even after taking into account the pre-committed capital support from its shareholders, which are large superannuation funds. The bank’s non-performing loan ratio is also higher than for some of its peers.
Nonetheless, the bank’s key shareholders have a large capacity to provide further capital support, if required. The bank has a high proportion of wholesale funding — at around 40% — although half of this is in the form of securitization, while the remainder is diversified across channels and investors. The bank’s relationship with large superannuation funds has supported deposits, even as the Australian government has allowed people affected by the coronavirus outbreak to access their superannuation savings early. The bank is also striving to increase the share of retail deposits in its funding mix over the longer term.
Plenty more where that came from.
