Moody's: Australia's Major Banks Make Their Money Without Having To Take Risks

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Ratings agency Moody’s Investors Service has affirmed a stable outlook for the Australian banking system but says interest rate margins will be under pressure.

“Banks continue to benefit from a concentrated industry structure which supports their profitability without requiring them to take excessive risks,” Moody’s says in its latest Banking System Outlook report.

“However, price competition for stable deposits will persist, and is evident for residential mortgages and high-grade corporate lending.”

Loan-price competition could rise as credit growth remains moderate, especially in residential mortgage and corporate lending.

“Pressure on interest income should be offset, to some degree, by lower overall funding costs as wholesale funding costs improve, allowing banks to ease competition for deposits,” the report says.

“We expect these factors will keep net interest margins relatively flat over our outlook period.”

The rating agency sees no threat to the market positions of the four major banks, which remain strong due to earlier industry consolidation, and the exit of foreign lenders.

“The major banks’ strong market shares have supported their pricing power, which has in turn allowed smaller lenders to increase their lending margins.”

However, loan growth is likely to remain moderate with competition in high-grade corporate lending and in residential mortgages.

Moody’s rates 13 of Australia’s 23 domestic banks, and three of the seven foreign bank subsidiaries operating in the country. Together the 16 rated banks account for 94% of total banking system loans.

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