The credit cycle has turned and the asset quality of the four major Australian banks will deteriorate gradually during 2016, says Moody's Investors Service.
The big four Australian banks have displayed a "moderate weakening" in asset quality and a slowdown in earnings growth in their latest financial results, according to ratings house Moody's.
The results have highlighted the "difficult operating conditions" prevalent over recent months, which has created a sharp rise (albeit from an "exceptionally low base") in large, single-name corporate loan impairments in the banks' institutional portfolios.
"Looking ahead, we expect the asset quality of Australian banks to come under further pressure due to multiple headwinds, including potential further stress in resources-related sectors and regions, a worsening outlook for residential property developments, and continued stress in the New Zealand dairy sector," said Moody's.
"Although these pressures currently appear moderate, we expect the banks’ credit metrics to deteriorate gradually over the rest of 2016."
Nevertheless, the four major banks retain "considerable financial strength", Moody's said.
"Their domestic retail franchises continue to exhibit exceptionally strong profitability. Residential mortgage portfolios are supported by record low interest rates. Finally, their balance sheets are solid, showing improved capital and liquidity buffers," the agency said.
"Consequently, while the weakened outlook for corporate asset quality could put pressure on the major banks’ credit profiles, particularly in the context of their very high ratings, we nevertheless expect the banks to remain strongly credit-worthy on an absolute and through-the-cycle basis."