Financial services giant UBS has downgraded Australia’s banking establishments amid expectations of a surge in funding costs, “fiercer” deposit competition, a deterioration in credit quality, and tighter regulatory oversight.
These headwinds are tipped to exacerbate stability fears, stoked by US bank collapses and the demise of Credit Suisse.
Australian banks, while resilient to stability risks, have not been immune to market volatility, with the ASX banking index falling 6.5 per cent over the past 12 months, compared to a 1.5 per cent dip across the broader market.
According to UBS analyst John Storey, instability in the US and Europe has underscored the importance of maintaining confidence in the banking system, with banking collapses largely attributed to a customer deposit drain.
As such, he expects Australia’s banks to battle it out for depositors to shore up their liquidity positions.
“In the Australian and global context, we think this makes it more likely that banks will compete more aggressively for deposits — to avoid being the bank with the worst deposit dynamics,” Mr Storey said.
He added investors should hedge risks by favouring larger banks with greater dependence retail funding, and geographically diversify their portfolios.
“Overall, we view the Australian banks and the overall system as well positioned to deal with the unfolding pressures on the global bank sector, with Australia’s relative outperformance corroborating this,” Mr Storey said.
The UBS downgrade comes just days after John Lonsdale, chair of the Australian Prudential Regulation Authority (APRA) lauded the strength of the Australian banking system, revealing findings from a recent stress test of 10 systemically important Australian banks.
Under the scenario, banks were subject to a “deep and prolonged global economic downturn” underpinned by rising interest rates and “prolonged inflationary pressures exacerbated by energy supply shocks”.
GDP fell 4 per cent, unemployment surged to 11 per cent, and national home values plunged 43 per cent over three years.
This resulted in sovereign and bank debt ratings downgrades, a temporary closure of offshore funding markets, a sell-off in the Australian dollar, and a widening in credit spreads.
Additionally, each of the 10 banks were hit with a “major and costly cyber attack”, with APRA also assuming no mitigating actions to absorb the shock.
Mr Lonsdale revealed all banks experienced significant credit losses under this scenario, with profits falling sharply and slashing investor dividends.
However, the banks remained above minimum capital requirements, retained sound funding and liquidity positions, and kept deposits “safe”.
