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Australian banking outlook ‘deteriorating: Fitch

By Charbel Kadib
4 minute read

Share markets have been rattled by the ratings agency’s decision to downgrade the outlook for Australian and New Zealand banks.

Fitch Ratings has revised its outlook for the banking sectors in Australia and New Zealand from “neutral” to “deteriorating” amid mounting earnings headwinds and credit quality fears.

The ratings agency said the slowdown in the broader economy threatens “bank credit metrics” over the second half of the 2023 calendar year.

According to Fitch, net interest margins (NIMs) peaked at the back end of 2022, with the Reserve Bank of Australia (RBA) expected to wind down its monetary policy tightening cycle over the coming months.


“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,” Fitch observed.

But these tailwinds, Fitch added, are “gradually dissipating”, with enhanced competition for new loans and deposits likely to compress future earnings.

Competitive pressures, Fitch added, would be compounded by weaker demand for credit, particularly in the residential mortgage market.

Moreover, the lagged impact of 400 bps in cumulative interest rate hikes from the RBA would place borrowers under stress and erode credit quality on the back book.

“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,” Fitch noted.

But bank losses are expected to be minimal, with RBA data projecting an increase in negative equity rates to just 2 per cent in the event of a further 10 per cent decline in residential property prices.

CoreLogic data has reported three consecutive months of national home value increases, totalling 2.3 per cent after hitting their trough in February.

Despite downgrading its overall outlook for the banking sector, Fitch said it expects individual institutions to withstand headwinds.

“We expect individual bank ratings to be resilient to the weaker sector outlook,” the ratings agency added.

“The outlooks on ratings for Fitch-rated Australian and New Zealand banks are predominantly ‘Stable’, with idiosyncratic issues driving the few that are not.”

But this could change, depending on the extent of the slowdown in aggregate economic activity and developments in the labour market in the battle to return inflation to the 2–3 per cent target range.

“…The risk of a sharper-than-expected economic slowdown and higher unemployment remains a key threat for bank metrics, particularly if this were to push house prices lower than we project,” Fitch added.

“The household sector is highly indebted in both countries, increasing its vulnerability to economic shocks, even if risks are mitigated by solid underwriting and households’ savings buffers.”

Fitch had forecast a terminal cash rate of 3.85 per cent by year’s end, with the RBA’s latest hike exceeding the expected peak and its subsequent statement open to further tightening.

The RBA’s decision came ahead of the release of the latest national accounts data, which revealed GDP slowed to 0.2 per cent in the March quarter, down from a revised 0.6 per cent in the previous quarter.

The March quarter result also fell below market expectations of a 0.3 per cent increase.

The S&P/ASX 200 index has fallen 11 points over the past five days in response to recent developments.

The Fitch downgrade also rattled markets on Thursday (8 June), spurring a 0.3 per cent dip in the index before it regained value before close of trading.

Westpac was the only big four bank to hold its value following the Fitch announcement, while the Commonwealth Bank took the biggest hit — down 15 per cent over the course of trading on Thursday.

Australian banking outlook ‘deteriorating: Fitch

Share markets have been rattled by the ratings agency’s decision to downgrade the outlook for Australian and New Zealand banks.

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