Fitch puts Australian banks on negative watch

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Fitch Ratings has revised its outlook on Australia’s banking for 2017 to negative from stable.

In its 2017 outlook report, the agency says the change reflects an increase in macroeconomic risks and pressure on profit growth.

The change follows Moody’s which in August last year changed the outlook for the banking system in Australia to negative from stable.

Profits at Australia’s banks are under pressure. The combined cash profits of the big four banks didn’t make last year’s record $30 billion.

Fitch now says Australia’s household debt is high and rising relative to disposable incomes, making borrowers sensitive to changes in the labour market and interest rates.

“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 chargesm,” Fitch says.

Fitch expects improvements in cost management to be offset by increased investment in technology.

The agency says the ongoing rise in household debt and house-price growth heightens the banking system’s sensitivities to a sharp correction if labour market conditions and interest rates changed.

“In addition, a worse-than-expected slowdown in China’s growth would negatively impact Australia’s economy given the countries’ strong economic ties,” the agency says.

“These scenarios — although not our base case — 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.”

Standard and Poor’s in July last last year placed Australia’s sovereign rating on credit watch negative from its previously stable outlook.

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