In its 2018 Outlook: Australian Banks report, Fitch Ratings cited a predicted increase in loan impairment charges and the banking sector’s high exposure to residential mortgages for its decision to downgrade its outlook for 2018.
The ratings agency’s report particularly mentioned an expected rise in loan impairment charges, challenges to asset quality and a drop in write-backs as further justification for its negative outlook.
Fitch also noted that tightened regulations imposed on the industry are likely to reduce business volumes and increase compliance costs, which it expects will have a negative impact on the banks’ bottom line.
“Australian banks’ profit growth is likely to slow in 2018 as global monetary tightening pushes up funding costs, loan impairment charges rise and tighter regulation [impacts] business volumes and compliance costs,” the report read.
Moreover, Fitch stated that the main risks to the banking sector’s stability “stem from high property prices and household debt”, but it added that despite the likely impact on profitability, macro-prudential measures imposed by the regulators have eased concerns over the sector’s vulnerability in the event of a downturn in the housing market.
“[The] proactive approach by regulators to address household debt risks, such as a tightening of underwriting standards and restrictions on investment mortgages and interest-only loans, should offer some protection to banks’ asset quality in the event of a housing market downturn,” Fitch said.
However, the ratings agency believes that at-risk Australians could struggle to manage their mortgage repayments and service their debt if interest rate rises in 2018.
“Australian banks are more highly exposed to residential mortgages than international peers, while households could be sensitive to an eventual increase in interest rates or a rise in unemployment, given that their debt is nearly 200 per cent of disposable income.
“A significant deterioration in asset quality in the mortgage sector could undermine bank profitability and weaken capitalisation, although this is not our base case.”
A modest reduction in economic growth in China is also expected to have “sharper” ramifications on the Australian banking sector, with Fitch predicting Chinese economic growth to fall from 6.8 per cent in 2017 to 6.4 per cent in 2018.