Moody's says profit margins at Australia's banks are at risk

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Increasing household debt, low wages growth, rising house prices and persistently low interest rates are putting bank profits at risk in Australia, says Moody’s.

“We expect the banks’ interest margins and profit growth to come under downward pressure,” says the ratings agency.

So far, the banks have managed to keep interest margins by using pricing power but Moody’s says a longer period of low interest rates — likely to persist over the next 12 months — is credit negative and will impact margins.

“Australia‚Äôs credit conditions and housing risks are starting to pose increasing challenges,” Moody’s says.

“The low nominal income growth prevalent over the recent years and a buoyant housing market in key regions have led to an increase in household debt and overall credit-to-GDP ratios.”

Moody’s says the sustained rise in house prices has created a bigger gap between house prices and incomes, making households more vulnerable to financial and market corrections.

“Coupled with bank portfolios that have unusually high levels of concentration to residential mortgages, we believe that risks to Australian banks are increasingly skewed to the downside,” Moody’s says.

The banks have increasing become exposed to the mortgage market, as this chart shows:

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