Australian banks are confronting a “protracted recovery” from the COVID-19 recession despite their strong capital buffers, according to S&P Ratings.
“Low interest rates, weak credit growth, and a drop in fee income threaten Australian banks’ earnings,” said S&P Global Ratings credit analyst Sharad Jain.
“Still, we believe banks’ reduced earnings should remain adequate to absorb elevated credit losses.”
Elevated unemployment, weak sentiment, net outward immigration and restrictions impacting home inspections and sales will drag down house prices by 10 per cent from the peak in April-May 2020, while the combination of high unemployment and fall in home prices will lead to higher credit losses given that home loans make up 60 per cent of bank loan books.
And while the recovery is underway, banks will still struggle to regain pre-COVID earnings metrics despite receding credit losses.
“Many businesses and households will suffer from the structural changes to the economy due to the downturn, in our view,” S&P said.
“Consequently, a large number of borrowers will struggle to meet their financial commitments even when the broad-based recovery takes place.”
A delay in finding a vaccine, more COVID-19 outbreaks, and an escalation in the strategic confrontation between the US and China could also prolong or deepen the economic downturn beyond S&P’s base case.
“Nevertheless, we believe that Australian banks should be able to preserve their creditworthiness in the next two years, despite the unprecedented economic disruption due to the COVID-19 outbreak," Mr Jain said.
“A downgrade on the Australian sovereign remains the main risk to our ratings on the four major Australian banks and Macquarie Bank Ltd.”
Economists agree that the Reserve Bank is likely to remain in inflation fighting mode until December. ...