Asset quality, earnings pressure loom over Australia's big banks

There is underlying economic uncertainty due to rising infections and stricter restrictions.

Australia’s four major banks are facing rising pressure on asset quality and earnings followed by government-imposed lockdown measures, says Fitch Ratings, although banks should have enough capital buffer to withstand moderate decay.

Market updates highlight the underlying high uncertainty regarding the economy which include downside risks due to spiking infections and possibility for heightened containment measures, analysts said.

The number of loan deferrals should decline from their peak as restrictions ease and the banks review arrangements with customers, but loan delinquencies and impaired loans will ultimately increase as a portion of borrowers will not be able to resume payments once the repayment holiday expires.

All four major banks recorded higher mortgage delinquencies come end-June with slight variations, in line with the different approaches to implementing support measures. Provisioning levels have increased in anticipation of higher impairments, but support measures will still hide the true asset quality standings of banks possible well into 2021.

Profitability will remain under pressure over the next 18 months as net interest margins contracted, partly due to rate cuts and the increased level of lower-yielding liquid assets.
Capital positions will remain relatively robust through the pandemic, reflecting substantial buffers that have been built up over the past decade, the report concluded.