‘The highly profitable major bank oligopoly is not under threat’

Australia’s major banks are forecast to continue performing strongly in 2015 and are said to be well-positioned to weather a mild recession.

Investment analyst Morningstar said the trading conditions for the major banks remain favourable, with earnings forecast to increase in 2014/2015 and 2015/2016.

This positive outlook is based on rising credit demand, lower wholesale funding costs, new technology boosting productivity and a manageable decline in the short-term bad debt position.

“The wide moat-rated Australian major banks are conservatively managed, highly profitable and diverse businesses, with strong and durable competitive advantages,” Morningstar said.

“Asset quality is stable – or modestly better – in core markets, with risks of higher bad debts held at bay as interest rates stay low, the economy grows and mortgages make up an increasing share of loan portfolios.”

Morningstar said the big four banks fared better from the Financial System Inquiry than many had expected.

The majors will be able to handle any requirement to hold more capital since this will probably be funded organically and by dividend reinvestment plans, according to Morningstar.

“Regulatory changes will be implemented over several years; we maintain our position that the highly profitable major bank oligopoly is not under threat,” it said.

Morningstar said the main risk for the major banks is a major recession caused by the collapse in commodity prices and the flow-on effect to Australia's services-based economy.

A sustained disruption to global wholesale funding markets is another major risk for the major banks, particularly if offshore funding becomes expensive or, worse, unavailable, it added.

Morningstar said the big four are “well-positioned to weather a mild recession”, but substantially higher bad debts could impact shareholder capital and potentially trigger dilutive capital raisings.

“Unemployment above seven per cent, combined with sharply lower house prices, could trigger higher bad debts, reducing earnings and dividends,” it said.

“But, in our opinion, falling house prices, in isolation, is not a major problem for bank profitability.

“Barring a severe and acute drop though, we believe potential losses would be covered by loan-loss provisions and pre-tax pre-bad-debt profits in most scenarios.”

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