‘No sh&t Sherlock’ might be the response to yesterday’s statement from Fitch Ratings that Australia’s banks face a tough 2016 with the prospects for slowing profit growth, possible increases in impaired loan charges and rising pressures on hopes for dividend growth.
‘Gee, we never saw that one coming’, might be another. Another reaction might be that we heard much of the same from analysts at the end of last year as they looked at the 2014-15 results of the Big Four banks, NAB, Westpac, ANZ and the Commonwealth.
Fitch Ratings predicted in a report that the cycle of very low loan losses, which has helped the banks to lift earnings in recent years, is set to run out of steam in 2016.
Despite these concerns Fitch has retained a “stable” outlook for the banks’ credit ratings. (now for reports from rivals, Moody’s and Standard & Poor’s).
Fitch tempered its earnings pressures forecast by saying this change will be “manageable” for banks.
Fitch says a combination of higher charges for soured loans, intense competition for borrowers, and higher funding costs will result in softer profit growth.
"Profit growth is likely to slow due to ongoing asset competition, higher funding costs, and an increase in loan-impairment charges. Improvements in cost management are likely to be offset by increased investment in technology.”
In 2015, the average profit growth for the Big Four, CBA, Westpac, NAB and ANZ was 5.3%, with earnings falling 4.7% in the second half of the year, according to analysis from PwC late last year.
"Bank earnings were down 4.7 per cent in the second half due to a combination of margin and cost pressures. Only one bank showed cash earnings growth in the second half," PwC said in November. Margins declined 4 bps year on year, at 2.02 per cent, margins are at record lows.
"Expense to income ratios rose 45 bps after adjusting for one-off items. Efficiency gains therefore remain elusive.The major banks have generated or announced over $33 billion in additional equity capital, reflecting regulatory requirements.
"We’ve yet to see the long-term impact of this on return on equity and the results do not show the impact of recent ‘out-of-cycle’ rate rises on net interest margins.Bad debt expense rose 8.9 per cent year on year, the first full year it has risen in 3 years, albeit off a low base. Asset quality metrics continue to improve,“ PwC said.
And in its report on the Big Four banks, KPMG said:
"Revenue and margin headwinds, rising costs and capital levels, with a deteriorating credit quality outlook all mean the majors will face challenges in reversing declining returns in the years ahead,” said Andrew Dickinson, Asia Pacific Head of Banking for KPMG.
“Recent increases in home lending rates have shown that the banks do have some market power to improve margins. But careful balancing of shareholder and customer interests will be required in future to ensure disruptors are not further emboldened to attack established lenders’ business models,” he said.
“It is likely we have now seen the bottoming of the credit loss cycle, and the trend in lending losses is now on an upward trajectory,” said KPMG’s Mr Pollari.
In a sign of banks’ sensitivity to the economy, Fitch yesterday predicted a "mild" increase in loan impairments due to softer pockets of economic growth.
It said loan exposures to mining and resources areas may remain troubled, though this remained a small part of the banks’ loan books. Titan Energy Services collapsed just before Christmas and on Monday Queensland Nickel went into Administration. The exposure of the banks to these problem companies is not known as yet.
Fitch also underlined the high level of household debt as another source of economic pressure for banks. But offsetting that, especially in housing, is the cushion of at least two years interest payments mortgagees are holding in their bank accounsts they repay loans faster than they should.
