Fitch: Profit Growth Expected to Slow for Australia's Major Banks
The four major banks have announced a combined net profit of AUD31billion at the financial year end in 2015 (FY15). This reflects an increase of 7.6% to the previous year, driven by improved loan growth, especially in the banks' housing loan books. However, net interest margins (NIM) have been challenged by fierce competition on assets while funding costs especially in the wholesale markets, have also increased. Nevertheless, the major banks' NIM still compares strong to similar rated peers globally. Asset quality remained solid but it appears that the credit cycle has bottomed as loan impairment charges increased for most banks.
Market conditions are likely to weaken slightly as Australia transitions from the mining investment boom towards a slower but steadier non-mining driven growth in FY16. At the same time, we expect the residential housing boom - especially in Sydney and Melbourne to slow. Fitch expects the major banks' FY16 results will be impacted by a softer operating environment and slower growth prospects, as well as continuing NIM pressure, possibly higher impairment charges, and more technology spending particularly when expense management experiences greater scrutiny.
NIMs of Australia's major banks are likely to remain strong relative to its international peers. Business lending and residential mortgage markets are likely to remain competitive and further margin pressure may arise if funding costs increase or interest rates fall. The announcement made by the major banks of an increase in some mortgage rates in response to higher capital requirements, should partly offset the NIM pressure.
Fitch believes that cost efficiency is likely to come under pressure as all banks continue to invest in technology which should support cost efficiency in the long-term and offset some disruptive competition pressure. However, these additional expenses will need to be absorbed at a time when revenue growth is slowing. Hence, we expect that the major banks will focus on tighter, non-technology related cost management.
Fitch expects loan impairment charges to rise from its cyclical low, reflecting the softer economy indicated by some risk migration, reflecting the pressure that certain industries and regions may experience. Fitch does not foresee a sharp deterioration in asset quality unless the banks' main markets experience a severe economic shock or interest rates were to increase sharply.
Fitch expects all major banks to focus on their main markets in Australia and New Zealand where they benefit from strong market share and pricing power. National Australia Bank (AA-/ Stable) remains on track to refocus on its core businesses and are likely to offload its UK business in early-2016 and reposition its wealth management business during FY16.
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