Outlook turns negative for mutual banks: Moody’s

Moody’s Investor Service has announced that it has revised its outlook for Australian mutual financial institutions to negative, due to weakened economic activity and rising unemployment weighing on asset quality, profitability and capitalisation throughout the rest of this year and into 2021.

Moody’s analyst Tanya Tang stated that due to a heavy focus on residential mortgages, the mutual sector is “heavily exposed to employment and housing market conditions”, making mutual banks susceptible to the economic fallout of COVID-19.

Households are facing significant financial stress, with residential mortgage loans that require repayment deferrals surging to between 5-10 per cent of mutuals’ mortgage books. 

However, eventual loan losses will be limited by generally conservative underwriting standards across the mutual sector, according to the investor service.

Further, Moody’s expects reported nonperforming loan (NPL) ratios to rise once lenders start to lift their six-month mortgage deferral periods for borrowers in financial distress, which have been in place since March 2020.

According to Moody’s, NPL ratios in the mutual sector will likely remain below Australia’s banking industry average, due to their lower-risk business models that are focused on residential asset-backed finance.

However, mutuals with heavier exposure to the most affected regions or sectors may need to increase provisions more than their peers, according to Moody’s.

At the same time, deposit growth will continue, underpinning mutuals’ funding.

“A steep increase in credit costs and narrowing net interest margins will weigh on profitability and, combined with growing capital consumption from weaker asset quality, will pressure capital ratios,” Ms Tang added.

“Moody’s baseline scenario is that coronavirus-driven economic disruptions will continue through the second quarter of 2020, followed by a modest recovery starting in the second half and continuing through 2021,” the report stated.

“Due to the lagging impact of an economic recovery on employment and household incomes, the mutual sector is likely to face an extended recovery in asset quality.”

Moody’s also noted that its outlook assessment could be revised back to stable, “if macroeconomic conditions in Australia improve, with prospects for a sustained recovery in employment”.

[Related: Big bank credit losses to far exceed mutuals: S&P]