FITCH: Australian bank profit growth is slowing

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Profit growth for Australian banks will slow because of weaker revenue, increasing funding costs, pressure on expenses and a likely increase in bad loans, according to analysis by Fitch ratings.

However, profitability will remain solid relative to international peers in 2016.

The major Australian banks have started to report flatter revenue growth after several years of strong gains, partly fuelled by a booming property market in Sydney and Melbourne.

The Commonwealth Bank’s full year revenue was up just 2% to $45.310 billion.

However, Australia’s big four banks still managed to post a combined $30 billion in cash profit for the latest full year, a rise across the four of 5.4%.

Fitch forecasts loan growth this year similar to 2015, likely to be driven by owner-occupied mortgages rather than investor mortgages and business loans.

“Banks are likely to experience further margin pressures due to loan competition and higher funding costs,” Fitch says.

Fitch believes that banks will focus on expense management to offset some of the revenue pressures.

However, this comes at a time when most banks are facing increased technology expenses and higher compliance costs.

“As a result, we forecast the banking sector’s strong cost/income ratio to moderately weaken but to remain better than in most international peer markets,” Fitch says in its Australian Banking Outlook for 2016.

“We believe the credit cycle has bottomed and expect loan impairment charges to slightly increase from their historical low levels.”

Fitch says household debt as a percentage of disposable income in Australia has continued to reach historical highs –- 184.6% at end-September 2015.

This has been fuelled by lending growth from the Sydney and Melbourne housing markets.

“High debt levels make households vulnerable to a sharp increase in interest rates and unemployment, which could weaken banks’ asset quality,” Fitch says.

“Fitch does not foresee an increase in the cash rate by the Reserve Bank of Australia. Increases outside the Bank’s cycle in mortgage rates might be possible but should be manageable for households.”

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