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Fitch: Aussie Bank Results Show Profit Pressures, Rising Capital
May 9, 2017 / 7:38 AM / 5 months ago

Fitch: Aussie Bank Results Show Profit Pressures, Rising Capital

(The following statement was released by the rating agency) SYDNEY/SINGAPORE, May 09 (Fitch) The latest results of Australia's four major banks show that narrowing net interest margins and slowing loan growth continue to weigh on profits, says Fitch Ratings. However, their profitability remains strong compared with international peers and further increases in capital have put them in a strong position to cope with tighter requirements that are likely to be announced later this year. The four major banks - ANZ, CBA, NAB and Westpac - posted combined net profit after tax of AUD14.6 billion on continuing operations in 1H17, which was a slight recovery from AUD14.3 billion in 1H16. Profits were generally supported by a decline in impairment charges, which in 1H16 were largely due to problems connected to the mining sector. Only Westpac reported an increase in impairment charges in 1H17. We still expect asset quality to deteriorate over the next couple of years. Some manufacturers will continue to struggle and the mining sector has still not fully adjusted to lower prices. Moreover, high household debt and low wage growth are starting to push up mortgage arrears. Recent increases in interest rates on some riskier types of mortgage - which came in response to regulatory changes - could add to strains faced by some borrowers, even if they support banks' net interest margins. Impairment charges might therefore edge higher again, but we expect pressures to be manageable. It would take a significant rise in unemployment or interest rates to cause meaningful losses on mortgage lending. Banks are likely to focus on containing costs to preserve profit margins in the face of a weak operating environment, but they are also under pressure to develop digital banking capabilities to fend off competition from non-banks. Investment in technology, as well as compliance, is likely to at least partially offset any initiatives to reduce costs. The major banks continue to position themselves to meet additional capital requirements that are likely to soon be introduced by the Australian Prudential Regulation Authority (APRA). All four now have common equity tier 1 (CET1) ratios of about 10%, based on APRA's calculations, which are already stricter than those in most peer banking systems. The current minimum, including the D-SIB and capital conservation buffers, is 8%. Capital generation is likely to remain strong amid weak loan growth, but risk-weighted ratios might not necessarily rise if the new requirements include increased risk weightings. Banks are also well-prepared for the introduction of the net stable funding ratio (NSFR) framework in January 2018. All of the major banks have estimated NSFRs of 105% or higher -above the initial 100% minimum, and close to the 110% that we think the banks will target as a buffer over the regulatory minimum. That said, Australian banks' funding and liquidity profiles remain weaknesses relative to many international peers. Contact: Tim Roche Senior Director Financial Institutions +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Jack Do Director Financial Institutions +61 2 8256 0355 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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