Profit growth for Australia’s major banks will be soft this year, according to rating agency Fitch in its latest banking review.
Fitch says the weaker growth mainly reflects competition, low interest rates, moderate credit growth and rising impairment charges.
The big four banks have been reporting worse than expected profit results, with cash earnings coming in at a combined $14.81 billion for the latest half-year, a fall of 2.5%.
Bad debts are also on the rise. Collectively, the big four banks have an exposure of more than $3 billion from a handful of recent high profile corporate collapses.
“Funding remains a weakness relative to similarly-rated international peers, with high reliance on offshore wholesale markets,” says Fitch.
Growing macroeconomic risks appear manageable in the absence of an economic shock, which could result from a hard-landing in China.
However, this isn’t Fitch’s base-case scenario. The agency has reaffirmed the ratings of all four major Australian banks at AA- with a Stable Outlook.
The risks include rising household debt and strong house price growth which has exceeded wages growth and continues to place pressure on housing affordability.
“Pockets of Australia’s property market may encounter potential oversupply of new residential housing and hurt house prices in those areas,” Fitch says.
“However, a stable labour market and historically low interest rates should limit the impact on the banks’ asset-quality.”
Fitch expects housing price rises to moderate to about 2% in 2016 due to tightened mortgage underwriting standards for investors and non-resident borrowers.
Some portfolios, such as resources, are likely to continue experiencing asset-quality pressure due to weak commodity prices, which Fitch does not expect to improve in the short-term.
However, the ratings agency says the banks’ exposures to mining and dairy remain manageable.