Media reports of the latest report from Fitch Ratings on the health of our big four banks did everything to find the downside – from over dependence on offshore funding (not quite), worries about the impact of a slowdown in China (not new) to fears about the impact of a downturn in housing prices (again not new).
But the reports and writers avoided pointing out high in their stories, that Fitch had not only reaffirmed the banks’ existing ratings, but actually ruled out some of the negatives found by the media.
“Growing macroeconomic risks appear manageable for Australia’s major banks in the absence of an economic shock, which could result from a hard-landing in China," Fitch Ratings say in an Australia bank report published on Friday.
“However, a hard-landing is not Fitch’s base-case scenario and the agency affirmed the ratings of all four major Australian banks at AA- with a Stable Outlook on 11 May 2016,” Fitch wrote in the first paragraph of its release.
That is not being pollyannaish the big four banks do face a period of slow and low revenue and profit growth, with dividends remaining under pressure (as we saw with the ANZ in its interim result earlier this month).
Investors seem to understand that and the fact that US rate rises will knock share prices around a bit.
But that seems to be out in the market, judging by the way the big four’s share prices went last week. ANZ shares rose 3% last week to end at $26.85 on Friday, Commonwealth Bank shares were up 1%1 to $78.90, and Westpac shares jumped up 2.3% to $30.98. National Australia Bank shares were flat at $27.30.
In the report Fitch said “strong company profiles are driving the Viability Ratings of the major banks, being Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited and Westpac Banking Corporation.”
"The profiles reflect stable, simple and transparent business models and a leading market-share in a number of products across Australia and New Zealand. This provides the banks with the pricing power to ensure strong and consistent profitability while maintaining a fairly conservative risk appetite relative to international peers.”
Fitch analysts wrote that they “expect soft profit growth in 2016, mainly reflecting asset competition, low interest rates, moderate credit growth and rising impairment charges.
“Capitalisation is likely to continue improving over the medium-term due to regulatory capital requirements, although capital ratios may decline as minimum average risk-weightings of 25% for residential mortgages are implemented from 1 July 2016.”
Low interest rates and “the country’s tax policies probably contributed to Australia’s macroeconomic risks.” That’s rating agency code for negative gearing of real estate and the favourable treatment it gets.
Fitch listed the risks as “rising household debt and strong house price growth that has exceeded wage-growth for a sustained period and continues to place pressure on housing affordability."
"Pockets of Australia’s property market may encounter potential oversupply of new residential housing and hurt house-prices in those areas. However, a stable labour market and historically low interest rates should limit the impact on the banks’ asset-quality.
"Fitch expects the banks to maintain tightened underwriting criteria implemented from mid-2015 to address regulatory pressure and a more challenging operating environment. This should limit asset-quality deterioration for recently originated loans.
"Some portfolios, such as resources, are likely to continue experiencing asset-quality pressure due to weak commodity prices, which Fitch does not expect to improve in the short-term. However, the banks’ exposures to mining and dairy remain manageable relative to total exposures.”
Again all this is not unknown (the dairy exposures are concentrated across the Tasman in New Zealand) and the problems in the mining sector have been with us now for three years and as Fitch points out, won’t improve any time soon.
And Fitch’s comments are similar to those from Moody’s, which the market took in their stride.
"Funding remains a weakness relative to similarly-rated international peers, with high reliance on offshore wholesale markets. The banks are likely to focus on lengthening wholesale funding maturity profiles and reducing short-term offshore wholesale funding, while gathering more stable deposits, to prepare for the implementation of the net stable funding ratio in 2018,“ Fitch said.
CLSA analyst Brian Johnson advised clients to remain “underweight” on the sector, citing slower growth in earnings per share, and the risk of dividend cuts and capital raisings, while Macquarie banking analyst Victor German said that low interest rates were negative for bank profits because they made deposits less profitable, and because low interest rates slowed the growth in their balance sheets.
But Mr German argues the banks’ high dividends will support share prices in the sector, and he says banks could deliver market-leading yields over the next five years.
