Australian bank shares have risen by around 20% since the election of Donald Trump on November 8, much to the disbelief and consternation of the usual suspects among the bears and gloom and doom merchants.
For whatever reason, investors decided in the closing weeks of 2016 that the earlier sell off and gloom around the banks – mostly the big four – was overdone and in the wake of the Trump rally on Wall Street and a belief banks will not have to put way as much capital as previously thought, investors changed their tune and bears became bulls.
In fact the 20% plus rally has been the best in six years and came without warning with much of the demand driven by big global investors.
But all good things must come to an end eventually in the eyes of the usual suspects among the bears, led by ratings group. This time it was Fitch which went all nego on Monday, slipping out a surprise report which downgraded its outlook for the sector in 2017 to “negative” on account of increasing economic risks and pressure on profit growth.
Fitch had previously given the banking sector with a “stable” outlook, and despite yesterday’s sector downgrade, still has a stable outlook for the individual Australian banks (which is a trifle confusing).
Fitch noted in its report that household debt is “high and rising relative to disposable incomes”, which makes borrowers sensitive to the health of the labour market and interest rates.
Fitch forecast: “Profit growth is likely to continue to slow in 2017, reflecting low interest rates, slow asset growth, competition for assets and deposits, higher funding costs, and a rise in loan-impairment charges.” (That is not ’new’ news.Those earnings concerns drove much of the sell off in 2016).
Strangely, Fitch introduced the health of the Chinese economy as a factor for the Aussie banks, arguing that a worse-than-expected slowdown in China’s growth would have a negative impact on Australia given the strong economic ties between the two countries.
Given that the Chinese economy ended 2016 stronger than all foreign analysts had forecast, to be all gloomy about China this early in 2017 is more than passing strange.
And Fitch wasn’t wholly negative – in fact it was an oddly drafted report.
The ratings group said that while the scenarios of rising household debt, unemployment and interest rates, as well as a slowdown in China, are not its base case scenario, but “could jeopardise the banks’ strong asset quality and profitability, and weaken capitalisation.
A prolonged global funding market disruption could place significant pressure on the banks’ balance sheets despite the improvements in liquidity.”
All those factors are not new and have been a constant for all banks not only Australian banks in recent years – but have failed to eventuate.
In December, the rival Moody’s ratings agency said that Australian banks demonstrated mildly deteriorating asset quality metrics during the six months to 31 September, but they remained well capitalised to withstand adverse shocks and their funding profiles had improved.
The Fitch report came as the key bank regulator, the Australian Prudential Regulation Authority outlined why it decided there were not enough signs that risks were building in the financial system to require the banks to hold more capital.
APRA set the level of the "counter-cyclical capital" buffer at zero. The buffer was introduced by global banking regulators as a tool to allow local regulators to manage an anticipated build up in risks by forcing systemically important banks to hold more capital.
The regulator said that in monitoring indicators of risk it had “not observed a change in the level of systemic risk that would necessitate a change in the level of the countercyclical capital buffer." These indicators include credit growth of households and businesses, asset price growth, lending standards and pricing and non-performing loans. APRA said that year-on-year investor housing credit growth had halved from 10% to 4.9% since September 2016 while overall housing credit growth had slowed from 7.5% to 6.4%.
But APRA did reveal concerns about the growth in house prices, describing it as “strong” even though it had slowed from its 2015 peaks. It noted a re-acceleration over the past six months to 7.2% even as rental growth as household income was relatively weak.
National house price growth was largely driven by Sydney and Melbourne which has annualised growth rates of 11.4% and 9% respectively.
APRA also said higher-risk home loans were falling as a proportion of new loans written, with high loan-to-value loans and interest-only loans declining on a relative basis since 2015.
The move by APRA is a big positive for the banks – not only the big four – for 2017 because it means they will not need to set aside more capital for the best performing pat of their loan books.
It is a positive big enough to offset whatever impact flows from Fitch’s switch to a negative outlook for the sector. The shares of the big four rose modestly yesterday by between 0.2% (CBA) and 0.9% (NAB).
