High household debt changes bank outlook to ‘negative’

Fitch Ratings has revised its outlook on the Australian banking sector to negative from stable due to an increase in macroeconomic risks and high household debt.

In a report released yesterday, the credit ratings agency warned that Australia’s household debt is high and rising relative to disposable incomes, making borrowers sensitive to changes in the labour market and interest rates.

Banks have already begun hiking their home loan rates, with many predicting further increases throughout 2017 as lenders struggle to maintain their margins.

“Profit growth is likely to continue to slow in 2017, reflecting low interest rates, slow asset growth, competition for assets and deposits, higher funding costs, and a rise in loan-impairment charges,” the report said.

Fitch predicts that a worse-than-expected slowdown in China’s growth would negatively impact Australia’s economy given the countries’ strong economic ties.

“These scenarios — although not our base case — could jeopardise the banks’ strong asset quality and profitability, and weaken capitalisation,” it said.

“A prolonged global funding market disruption could place significant pressure on the banks’ balance sheets despite the improvements in liquidity.”

The report comes just one month after Moody’s warned that the asset quality of Australia’s major banks is likely to come under pressure from “multiple headwinds” in 2017.

Meanwhile, in November S&P revised its credit outlook to negative for 25 Australian banks, warning of rising risks due to high private debt and residential property prices.

The credit ratings agency said that economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months.

“Our base-case scenario remains that the growth in property prices and private sector debt will moderate and remain at relatively low levels in the next two years,” S&P said.

“However, in our alternative case, we assess that there is a one in three chance that the strong growth trend will resume and economic balances will continue to build, which in our view would increase the risks that a sharp correction in property prices could occur.

“In that event, credit losses incurred by all financial institutions operating in Australia would be significantly greater.”

[Related: Pressure mounting on bank assets: Moody's]

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