Earnings boost for Australian banks in 2021, but headwinds persist

Deterioration in asset quality will likely emerge in 2021.

Major Australian banks will see their earnings boost in 2021 thanks to lower provisioning charges, one-off items and remediation costs, but persistent headwinds endanger the rate of recovery, according to a Fitch Ratings report.

The earnings updates provided by the four major banks were consistent with analysts’ expectations, with all negatively affected by the lockdown-induced economic fallout, and deterioration in asset quality likely to emerge in 2021.

Downside risks to earnings include lukewarm growth, margin compression, high investment expenditure and more provisioning charges, the report said.

Remediation charges across the four banks hit $1.24b (A$1.7b) for FY2020, down from $2.78b (A$3.8b) a year earlier. The banks will incur remediation costs for a number of years, but will decrease given the divestment of non-core operations. Total investment expenditure exceeded $4.39b (A$6b) in FY2020 and is likely to remain high, but this should improve efficiency over the longer term.

Asset quality will deteriorate in 2021 as government support measures and loan repayment deferrals taper off. Capital positions will remain strong over the next two years, and there is limited funding and liquidity pressure on the banks due to high system liquidity and support from the central bank.

Moreover, the banks have sound loss-absorption buffers at their rating levels, supported by accommodative fiscal and monetary policy, Fitch concluded.