Fitch: Aussie banks remain on downgrade watch

Yep. Via Fitch:

Fitch Ratings has maintained the Negative Outlook on the ratings of Australia’s four largest banks to reflect the downside risk to its base case; the four banks are Australia and New Zealand Banking Group Limited (ANZ, A+/Negative/a+), Commonwealth Bank of Australia (CBA, A+/Negative/a+), National Australia Bank Limited (NAB, A+/Negative/a+) and Westpac Banking Corporation (WBC, A+/Negative/a+).

We do not expect to resolve the Negative Outlook until early to mid-2021, when there should be greater clarity on the banks’ asset quality and other core financial metrics. An outcome that is aligned with or better than our base case is likely to result in a revision of the Outlook to Stable. A rating downgrade of any bank would only occur if the bank’s credit profile deteriorated more rapidly and was significantly weaker than our base case in light of the sound buffers at the current rating level of all the banks; see ‘Negative Australian and New Zealand Bank Outlooks Unlikely to be Resolved Until 2021’ at www.fitchratings.com/site/pr/10130404

We believe there is downside risk to our economic base-case forecast, despite the improving economic outlook, and maintain a negative outlook on the banks’ ‘aa-‘ operating environment score. Fitch expects Australia’s GDP to contract by 3.6% in 2020 under our base case, before recovering by 3.9% in 2021; for details, see our latest Global Economic Outlook – September 2020 at www.fitchratings.com/site/re/10135033. We are likely to revise the operating environment factor outlook to stable should our base-case emerge, possibly in 1H21.

We also have a negative outlook on the ‘a+’ asset-quality scores across the banks to reflect the elevated risk of impaired loans significantly exceeding our base case. We think asset-quality could deteriorate further in 2021 following the unwinding of support measures and loan repayment deferrals. The level of deterioration remains unclear, however, total deferred loans have declined from peak levels. It could take a number of years to resolve elevated impaired loans, reflecting the significant scale of the economic shock caused by the coronavirus pandemic.

Profitability will continue to suffer in the next 12 months due to record-low interest rates, slowing credit growth and possible additional provisioning charges; however, low-cost funding facilities provided by the central bank could provide some offset. We also expect persistently elevated investment costs, impacting banks’ efficiency in the short-term but delivering longer-term cost reductions. We maintain a negative outlook on banks’ earnings and profitability scores, as the scores could be lowered if core metrics fall below levels commensurate with the current scores; ANZ and NAB at ‘a’ and CBA and Westpac at ‘a+’.

We believe the major banks’ capital buffers are commensurate with their risk profiles, although a moderate decline of the capital ratios is probable in the short term. Banks’ funding and liquidity profiles has been bolstered by high system liquidity deployed by the central bank; this should help them maintain their strengthened liquidity positions over the next 12 months, as they are unlikely to issue senior unsecured debt in the primary wholesale markets as a result. The stable factor outlooks on capitalisation (factor score of ‘a+’) and funding (factor score of ‘a’) reflect our view that these factors will be less affected by the pandemic than asset quality and earnings.

But house prices!

David Llewellyn-Smith

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