Australia's major banks face a tougher grind in the year ahead, as charges for bad loans creep up from record lows and the lenders are put under the microscope of a royal commission, Fitch Ratings warns.
After the big four chalked up more than $30 billion in combined earnings last year, the credit ratings agency on Monday maintained a "negative" outlook on the sector and said there would be greater "pressure" on profit growth, due mainly to various economic trends buffeting the industry.
"Profitability is likely to slow in 2018, reflecting low interest rates, slow asset growth, competition for assets and deposits, higher funding costs, and a rise in loan-impairment charges," it said in an outlook report.
Even so, the ratings agency still believes the banks will remain "very profitable" compared with banks in many countries, as the rise in costs from dud loans would be manageable.
With property prices coming off the boil in Sydney and Melbourne, it noted that Australian households' ratio of debt to disposable income had climbed to new record levels. This puts borrowers at greater risk of any rise in borrowing costs.
The major banks hold about two thirds of their loans against residential property, but the report said a significant decline in mortgage asset quality was unlikely unless interest rates or the unemployment rate rose sharply.
"Household debt reached nearly 200 per cent of disposable income at September 2017. Combined with low wage growth and high underemployment, this leaves households susceptible to higher interest rates and deteriorating labour market conditions," the report said.
Retail exposure
It said the banks' corporate loan books could also be affected by the difficulties in the retail sector, though it said retailers and wholesalers only accounted for no more than 4.8 per cent of exposures at default.
At the same time, banks are facing less pressure to build up
capital than in previous years after the regulator last year settled on new rules on balance sheet strength.
A report from Morgan Stanley analyst Richard Wiles said capital management would be "in focus" for the banks, tipping ANZ Bank would lift its buyback from $1.5 billion to $3 billion this year.
Fitch said the royal commission to be led by former High Court judge Kenneth Hayne could also challenge profits, even if it did not uncover new systemic problems.
Reputation risk
Banks' reputations had already been damaged by the debate leading up the inquiry, Fitch said, and any further damage "could exert further pressure on profitability" by pushing up what foreign investors charge banks for debt.
"Any loss of trust may lead to higher wholesale funding costs, which in turn could intensify competition for deposits and push up funding costs for the entire system," it said.
Banks, insurers and superannuation funds have until the end of the month to provide commissioner Hayne with a summary of misconduct at the lender over recent years, though it is unclear whether the commission will release these documents publicly.
