The profitability of the big four will take a hit as net interest margins contract, reflecting the reduction in interest rates and the increased level of lower-yielding liquid assets, according to Fitch Ratings.
“Economic conditions in Australia at this point appear to be somewhat better than we originally anticipated in March 2020, probably due to the extent of authorities’ relief measures, although impairment charges continued to rise reflecting ongoing uncertainty,” Fitch said.
New efficiency initiatives being rolled out across the big four and a decrease in mortgage deferrals could offset some of the pressure, but Fitch said it was unlikely to resolve its negative outlook for the banks until early to mid-2021.
“We expect the number of loan deferrals to continue declining from their peak as restrictions ease and the banks review arrangements with customers,” Fitch said. “However, loan delinquencies and impaired loans will ultimately increase as we believe a portion of borrowers will not be able to resume payments once the repayment holiday expires.”
All four banks reported higher mortgage delinquencies, with “substantial variation” reflecting different approaches to implementing COVID-19 support measures rather than any significant differences in the underlying credit quality of each bank’s portfolio.
“Provisioning levels of the banks have continued to rise in anticipation of higher impairments in the future,” Fitch said. “This is also broadly consistent with our expectations.
“However, support measures continue to mask the true asset-quality positions of the banks and are likely to do so well into 2021.”
The big four reported better-than-expected results, with only Westpac opting to defer its dividend. Fitch expects the banks’ capital positions to remain “relatively robust” through the pandemic due to the buffers that they’ve built up over the past decade. The banks reported either flat or increased CET1 ratios from the previous reporting period, assisted by a reduction in dividends or asset sales and capital raisings.
