Concentration could save bank profits amid RC risks

A Moody’s Investor Service report argues that the banking sector’s profitability is set to take a hit as tighter underwriting standards imposed amid the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry take effect.

However, Moody’s has suggested that profit losses incurred as a result of a slowdown in the flow of credit would be mitigated by market concentration in the banking sector.

“We view the possibility of a slowdown in credit growth resulting from tighter mortgage underwriting as a risk to the banks’ profitability,” Moody’s vice president and senior credit officer Frank Mirenzi said.

“Nevertheless, the concentrated structure of the industry will continue to underpin the banks’ credit profiles.

“In particular, the [royal commission’s] recommendations alone are unlikely to alter the concentrated structure of the banking system, which offers favourable competitive dynamics for incumbent banks.”

Moody’s also claimed that increased scrutiny from the commission on financial advice would not expose banks to further risk, adding that the banks have “already been shifting away from such services”.

The analysts also noted that the benefit of the banks’ reduced exposure to such services would offset the loss of the “relatively small profit contributions from financial advice”.

Further, Moody’s claimed that penalties incurred by the banks in the wake of the royal commission would “prove heavier than those imposed in the past”, but said that it believes such penalties would be “manageable for the banks, given their strong profitability”.

Moody’s affirms Australia’s AAA credit rating

Moreover, Moody’s recently affirmed Australia’s AAA credit rating with a stable outlook.

Moody’s attributed its decision to:

• relatively high and stable growth
• strong growth potential
• diversity and flexibility
• strong institutions that preserve macroeconomic and financial stability

Treasurer Scott Morrison welcomed the announcement and cited a Moody’s statement which acknowledged the government’s “ongoing, repeated commitment to fiscal consolidation” as well as the “successive budgets that have aimed to restrain spending and raise revenues demonstrate this commitment”.

“The government’s record of strong economic management has ensured Australia’s AAA credit rating has been maintained with all three major ratings agencies, one of just 10 countries to have achieved this,” Mr Morrison claimed.

However, in its report, Moody’s also noted potential “hurdles to fiscal consolidation”, which Mr Morrison claimed was reflective of potential opposition to the government’s “responsible plans to keep a tight rein on spending”.

Mr Morrison added: “This is a further caution to the Parliament, particularly the Labor opposition, on the need to back our plan for a stronger economy to bring the budget back into balance and pay down debt.”

[Related: RC changes S&P’s view of Australian banking system]