Major Australian banks may take long to recover from headwinds

Hefty loan impairment charges may remain elevated.

Major Australian banks may take a few years to fully recover from an anticipated eroding operating environment as their profitability have already plunged sharply in the first half of FY2020, according to a Fitch Ratings report.

Sizeable loan impairment charges were booked, which could remain heightened, if not increase, over the next six to 12 months as pressure on asset quality materialises later this year.

Three of the four major banks—Australia and New Zealand Bank (ANZ), National Australia Bank (NAB), and Westpac—reported significant growth in impairment charges for H1 FY2020, the report said, reflecting the expected decay in asset quality due to government measures to contain the coronavirus.

The net interest incomes of the three banks were stable for the period, but Fitch believes that earnings will crumble over the next 12 months, reflecting the effect of lower interest rates and the possible downturn in economic growth.

The overnight cash rate cut of 50bp to 0.25% in March has resulted in a decline in the net interest margin for ANZ and NAB in H1 FY2020 and will probably weigh on the profitability for all the major banks this year, the report said.

“Regulatory compliance and customer remediation-related costs may continue to affect operating expenses, although the magnitude of these items should be less significant as the banks have made progress over the last two years to address these issues,” Fitch wrote.

Impaired loan ratios should significantly surge in H2 2020 or H1 2021, once repayment holidays end, as many firms and households are unlikely to resume repayments despite high government support, the report added.

Capitalisation should remain sound over the next two years, although buffers may contract due to the erosion in profitability and asset quality. The contraction in internal capital generation will be partly offset by the options available to the banks in managing capital if required, the report concluded.

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