Credit ratings agency Moody’s has changed the outlook for Australia’s banking system from stable to negative, reflecting an increasingly challenging lending environment.
Speaking to Mortgage Business, AMP chief economist Shane Oliver explained that the likely reason for Moody’s decision is a concern regarding the banks’ increase in non-performing loans, higher funding costs, and slowing growth in lending and earnings.
“The back-drop has gone from being a very positive one for the banks which dominated over the last few years, to one which is more uncertain,” Mr Oliver commented.
“Since the GFC, the environment has generally been on the mend with low and falling non-performing loans, falling cost of capital and good credit growth in the last five years, but all of those things are now turning around to become less favourable,” he explained.
“The easy days seem to be behind [the banks]; they’re transitioning into a more difficult environment,” he added.
The change in outlook comes after three of the big four banks posted a fall in profits and all reported increasingly difficult lending conditions.
NAB’s quarterly results showed unaudited cash earnings of approximately $1.6 billion, 3 per cent lower than the quarterly average for the March 2016 quarterly results and 3 per cent lower than the prior corresponding period. The group’s CEO Andrew Thorburn commented that the bank did feel the pressure of higher funding costs over the quarter, which had a material impact on NAB’s net interest margin (NIM).
Earlier this year, ANZ announced a statutory profit after tax of $2.7 billion for the half-year ended 31 March 2016 — down 22 per cent, and a cash profit of $2.8 billion, down 24 per cent.
Although Westpac posted a 3 per cent profit increase in its half-yearly results, the group’s CEO commented that he expects bad consumer loans to rise.
Meanwhile, CBA last week posted a record $9.5 billion profit after tax on a cash basis, up 3 per cent from the prior year.
However, Mr Oliver pointed out that despite Moody’s revision of the big four’s outlook, it’s not likely that banks credit ratings will be downgraded.
“They’re just on negative watch at the moment. But the risks are there obviously if the non-performing loans continue to rise,” he said.
[Related: Stable outlook for Australia's AAA rating]