Major banks to face multipronged earnings test

Moody’s Investor Service has issued an update on its outlook for the big four banks, which continue to grapple with the economic fallout from the COVID-19 pandemic.

The ratings agency noted that the ratio of non-performing loans (NPLs) managed by the big four banks increased over the June quarter by as much as 34 bps, reflecting the early impact of the pandemic on borrower serviceability.

However, Moody’s expects NPLs to “start increasing significantly” towards the end of March 2021, as loan repayment holidays begin to expire.  

Accordingly, the group expects credit impairment charges to remain high in the months, with the potential for further increases in the event of a deeper downturn in the domestic economy.

According to Moody’s, cost pressures associated with the sustained increase in credit impairment charges would be exacerbated by weak revenue growth, with supply- and demand-side factors stunting credit growth.  

“Credit growth accelerated sharply in March as a result of institutional and corporate customers drawing down on their credit lines, but it has since slowed and is likely to remain subdued,” Moody’s noted.

“Tighter lending criteria will constrain growth in housing loans, while weak household confidence is likely to suppress credit demand.

“Growth in business loans, which has dropped off since March, is also likely to remain weak, given challenging economic conditions.”

Moreover, Moody’s expects the big four’s net interest margins to remain under pressure amid record-low interest rates and strong competition in the mortgage market.

“As part of measures to aid borrowers, and because of reductions to the cash rate, the banks have cut lending rates, both for residential mortgages and business loans,” Moody’s added.

“Weak credit growth and banks’ high levels of liquidity may also intensify competition for loans, prompting banks to lower loan rates even more.”

Moody’s added that banks would not be able to offset costs associated with lower mortgage rates by reducing deposit rates.

“Corresponding reductions in deposit rates are unlikely, given that a proportion of deposits already earn almost zero interest. As a consequence, margins will tighten further,” the ratings agency stated.

Moody’s added: “As a result, we expect the four banks will continue to hold large volumes of liquid assets that do not earn much interest income.”

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