Australia's Big Four banks face stage 3 loan risks as rates rise

Intense competition and rising costs are expected to reduce margins.

Australia’s biggest four banks are well-positioned to withstand macroeconomic headwinds over the next two years, including slowing economic growth and geopolitical tensions, said Fitch Ratings.

All four banks have “superior earnings metrics relative to peers” based on their default ratings and hold stable outlooks.

Fitch expects a moderate improvement in earnings for the banks over 2026.

“Margins should benefit from higher interest rates, although competition and cost inflation are likely to erode some of these benefits,” the ratings agency said in a commentary published on 26 March.

Higher interest rates, inflationary pressure on the cost of living, and a modest increase in unemployment in 2026 will drive a modest weakening in stage 3 loans in 2027, it added.

Stage 3 loans are loans where the credit risk has increased to the point where it is considered credit-impaired, according to the Bank of International Settlements (BIS).

A prolonged conflict in the Middle East could heighten second-order effects on the domestic economy, Fitch further warned. This will reportedly result in weaker financial metrics for the major banks than its current base case.

However, “Collateral positions are strong across the peer group, supported by strengthened mortgage underwriting since the mid-2010s,” it said.