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CBA results proof of emerging ‘earnings pressure’: Fitch

A major bank’s full-year results signal the emergence of increased earnings pressure in the Australian banking sector, according to Fitch Ratings.

The Commonwealth Bank’s full-year 2018 (FY18) financial results revealed that the bank’s net profit after tax (NPAT) took a hit over FY18, falling by 4.8 per cent to $9.23 billion.

The result was underpinned by a fall in CBA’s home loan settlements, with the number of new home loans settled dropping by $4 billion year-on-year, from $49 billion to $45 billion.

The major bank also reported modest growth in its net interest margin (NIM), which rose by 5 basis points from 2.1 per cent to 2.15 per cent. CBA attributed it to stiffer lending competition and a rise in funding costs.

Arrears underlying the bank’s mortgage portfolio also increased year-on-year, rising by 10 basis points from 0.6 of a percentage point in FY17 to 0.7 of a percentage point in FY18.

According to Fitch, the big four bank’s results are a sign of increased earnings pressure in the Australian banking sector, which it expects to continue throughout 2018 and into 2019, amid weakness in the domestic credit and housing markets.

“The Commonwealth Bank of Australia’s full-year results broadly support the agency’s expectation that earnings pressure would emerge for Australian banks during 2018,” the ratings agency said.

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“An increase in wholesale funding costs led to a reduction in CBA’s net interest margin in 2H18, loan growth continued to slow and continued investment into the business and compliance contributed to higher expenses.

“Mortgage arrears also trended upwards due to some pockets of stress, and while they have not translated into higher provision charges as yet due to strong security values, continued moderation in Australian house prices may result in higher provisioning charges in future financial periods.

“Most of the earnings issues appear applicable across the sector and are likely to remain into 2019, placing pressure on profit growth for all Australian banks.”

Additionally, Fitch claimed that ongoing regulatory scrutiny faced by the sector could limit the banks’ ability to ease revenue pressures through product repricing.

“Increased regulatory and public scrutiny of the sector may make it difficult for the larger banks to reprice loans to incorporate the increase in wholesale funding costs, meaning net interest margins are likely to face some downward pressure,” Fitch continued.

“Loan growth is likely to further slow down as the housing market continues to moderate, while compliance costs continue to rise due to the scrutiny on the sector.”

The ratings agency noted that recommendations made off the back of the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry, which “has already identified a number of shortcomings”, could have further implications on bank profitability.

“We expect the release of the interim royal commission report, due to be published by the end of September 2018, to give a better view of how widespread these shortcomings are and what impact they may have on the credit profile of Australian banks.”

[Related: CBA confident of lending rebound following $4bn drop]

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