Economic slump will drag Australian banks' loan performance: analysis

Wider effect will depend on stimulus measures and severity of disruption.

The economic impact of the coronavirus will weigh down on Australian banks’ loan performance, but the wider effect will depend on severity of the disruption and effectivity of government stimulus measures, a Moody’s report revealed.

Loan defaults are expected to deteriorate as economic movement freezes and unemployment continues to rise. Rising loan-loss provisioning, record low interest rates, and strong pricing competition on the top of low loan growth would hurt profitability, the report noted.

Moody’s sees a weakness in internal capital generation, particularly at smaller banks, causing decay in buffers against loan losses.

Measures directed by the Reserve Bank of Australia (RBA) continue to bolster bank funding and liquidity conditions, including government bond purchases and a funding facility for credit intermediation and long-term repo activity, as well as minimised consumption which is contributing to an increase in deposits.

On the other hand, wholesale funding stability could be in peril if the pandemic persists, as it is generally more price and confidence-sensitive.

Amongst rated Australian banks, those with direct exposure to the most negatively affected sectors could see greater negative rating implications, and for those with smaller financial buffers compared to expectations for their current ratings, Moody’s concluded.

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