The credit ratings agency has decreased the Issuer Default Ratings of the major banks by one notch, from AA-/F1+ to A+/F1+.
Despite the institutions being considered well capitalised, Fitch has said further downside risk remains in its baseline case, making it retain a negative outlook on the ratings.
The agency has revised the outlook on the operating environment score for banks in both Australia and New Zealand to negative from stable as part of the action.
It expects GDP to shrink in both markets in the first half of the year, with only a moderate recovery to follow in the second half and to extend into 2021.
“Unemployment is likely to spike sharply and remain very elevated relative to pre-pandemic levels even after the recovery is underway,” Fitch stated.
But, if the downturn is extended into the second half, or if the recovery is shallow and results in weaker conditions next year, Fitch has said its operating environment score could worsen.
It expects the economic conditions to affect asset quality and earnings in particular.
Earnings are also tipped to face pressure from both higher impairment charges and lower interest rates, particularly as the Australian and Kiwi central banks have indicated their 0.25 per cent cash rates will remain the same for a prolonged period.
“The bank’s earnings were already vulnerable before the pandemic hit, which was reflected in the negative outlook on the factor” Fitch’s analysis said.
“The challenges from the outbreak are likely to exacerbate this pressure.”
Further, the analysis has said a portion of business is expected to fail to restart during recovery, with some household not being able to resume debt repayments.
“As a result, asset-quality metrics will likely weaken from current levels over the next 12-18 months and, for the four large Australian banks, we expect them to no longer be consistent with a ‘aa-’ factor score,” Fitch said.
