LA Private

Fitch gets a twitch about Oz / NZ Banking sector

Ratings agency Fitch on Thursday downgraded its view of Australian and New Zealand banks to “deteriorating” from “neutral”, warning of further headwinds against earnings and asset quality.

Fitch said the revision has been driven by weakening economic activity and its effects on bank credit metrics in the second half of the year.

The warning shouldn’t impact their ratings, Fitch said, with all four still at A+/Stable/a+.

“The adjustment in the banking sector outlooks has not been driven by major revisions to our baseline assumptions, but rather the greater impact that weakening economic activity will have on bank credit metrics in the second half of the year.

“That said, we have modestly revised down our 2023 economic growth forecast for New Zealand, to 0.8% at present, from 1% in December 2022. Our forecast for Australia remains unchanged at 1.5%,” Fitch said on Thursday.

“In Australia, we see net interest margins (NIMs) as having peaked late last year. The interest rate hike cycle appears close to its end. NIMs benefited from a strong uplift in the current cycle, as high inflation led to a relatively fast and steep rise in rates, while savings buffers built up during the Covid-19 pandemic initially dampened deposit pricing.

“However, we believe that these effects are gradually dissipating and we expect stronger competition for loans and, increasingly, deposits, to pressure NIMs through 2H23.”

At the same time, we forecast loan growth in Australia to slow, particularly in mortgages, as higher rates deter new borrowers, and impairment charges to rise from still-low levels as arrears pick up.

“Higher rates will cause asset quality to weaken in both the commercial and mortgage books, albeit from very strong levels and not to a degree that would pressure bank ratings under our baseline assumptions.

“Negative equity levels remain low – the Reserve Bank of Australia (RBA) projects they will rise to just 2% even if house prices fell by a further 10% from January 2023 levels – reducing the risk of bank losses.”

Thursday’s announcement was a quick follow up to the May 9 warning about the country’s big four banks – Commonwealth, Westpac, NAB and ANZ.

“Australia’s four major banks face weakening margins from competition and rising funding costs, increasing loan impairments and slowing growth over the next 18 months, Fitch Ratings says, after the bank reporting season in May.

“Even so, we expect the major banks’ financial profiles to remain sound and not put pressure on their current credit ratings,” Fitch said in the May statement.

And that in turn was a quick update from an April statement from the ratings group that contained similar sentiments.

“We expect the earnings metrics of Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation to remain relatively stable over the next two years despite some pressure into 2024,” Fitch said in its latest statement on Thursday.

“Net interest margins are likely to peak this financial year, before falling in the next as the cash rate stabilises, and funding costs increase.

“Impairment charges are also likely to rise, as we expect a decline in asset quality following the rapid increase in interest rates, while inflation will affect operating expense growth,” Fitch said in April.

So the upshot of the three statement in April, May and June, is that conditions will get tougher for Australian banks (and those in NZ, which is dominated by the big four Australians) but Fitch doesn’t see any fundamental worsening that would threaten the baseline ratings of the banks.

And what was the market reaction? Well apart from the CBA (up 0.2%), the other big banks fell – Westpac shed 1.5% in value, NAB, 1.8% and the ANZ slipped a tiny 0.04%.