Moody's says the royal commission risks eroding bank profitability

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  • Moody’s raises the possibility of a slowdown in credit growth resulting from tighter mortgage lending rules following the financial services royal commission.
  • This would risks eroding bank profitability.
  • The ratings agency says any penalties in the wake of the commission wopuld be manageable for the banks, given their strong profitability.

Moody’s Investors Service says a focus by the financial services royal commission on the residential mortgage practices of Australian banks, as well as their relationships with brokers, carries potential profit implications.

The commission has raised questions about whether banks have fulfilled their obligations to verify the reasonableness of applicants’ living expenses based on their individual circumstances.

This could mean that some bank customers are over leveraged on their loans.

And reviews by APRA (Australian Prudential Regulation Authority) of the four major banks’ mortgage serviceability standards has found a number of deficiencies, which banks are rectifying.

“We view the possibility of a slowdown in credit growth resulting from tighter mortgage underwriting as a risk to the banks’ profitability,” says Frank Mirenzi, a Moody’s Vice President and Senior Credit Officer.

“Nevertheless, the concentrated structure of the industry will continue to underpin the banks’ credit profiles.

“In particular, the commission’s recommendations alone are unlikely to alter the concentrated structure of the banking system, which offers favorable competitive dynamics for incumbent banks.”

Moody’s analysis is contained in its report, Banks – Australia: Royal Commission is risk to profitability but sector structure
will support credit profiles
.

The agency points out that financial advice has also caught the commission’s attention, but the banks have already been shifting away from providing such services.

Moody’s says the benefit of the banks’ reducing their exposure to these challenges offsets the loss of the relatively small profit contributions from financial advice.

While any penalties likely to be imposed in the wake of the commission will prove heavier than those imposed in the past, Moody’s says
such sanctions will be manageable for the banks, given their strong profitability.

The fourth round of royal commission hearings, with a focus on regional and rural Australia, is due to start later this month.

The Hayne royal commission was established following a series of scandals, involving the big four banks and financial giant AMP, including charging for financial advice not given.

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