Household debt pressure on banks: Moody's

While Australia’s four major banks reported steady results and rising capital buffers for the 2017 first half, rising household leverage and low wage growth are increasing the major banks' sensitivity to external shocks.

"Margin pressure and rising mortgage delinquencies in resource-focused regions also hint at more challenging times ahead for the banks," added Daniel Yu, an analyst with the ratings firm Moody's.

A Moody's report pointed out that the banks' return on assets showed a slight improvement during the half - despite continued pressure on margins - because of the lenders' contained cost growth.

However, looking ahead, Moody's is expecting profit growth to moderate, given the pressures that the banks face from low interest rates and competition, as well as the potential for rising credit costs and slower credit growth.

Further, the ratings firm warned that the budget that Canberra handed down last week includes a number of initiatives that, if implemented, will place incremental pressure on the banks' profit growth.
 

Balance sheet buffers

Asset quality remains healthy and continues to be supported by low interest rates and stable employment. All four banks reported non-performing loans below 1 per cent and credit costs remained well below long-term averages. 

“However, an increase in 90+ day housing delinquencies in Western Australia highlights the continued challenges in regions that are more exposed to the resource and mining sectors,” said Yu.

“On the other hand, the banks have shown continued improvement in their balance sheet buffers. Capital levels continued to improve in the half and look set to strengthen further, with APRA scheduled to release its plans in the middle of this year on ensuring that bank capital is unquestionably strong.”

The credit analyst also pointed out that the major banks are maintaining robust liquidity profiles, reflected by their consistently high liquidity coverage ratios. Also, Yu added that the big four are well positioned to meet the net stable funding ratio that will come into effect on 1 January 2018.

Overall, Moody's concluded that while the banks' headline metrics continue to hold up, their results do not change Moody's view that rising tail risks in the household sector are pressuring their credit profiles, particularly in the context of their very high ratings, and as reflected in their negative rating outlooks.

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