Sluggish profit growth await Australia’s banks in 2016: Fitch

Blame it on a triple threat of factors.

Australia’s banks are up for a slower 2016 as its profit growth is threatened by ongoing asset competition, higher funding costs, and a modest increase in loan-impairment charges.

According to ratings agency Fitch, even improvements in cost-management are likely to be offset by increased investments in technology.

Meanwhile, Fitch generally maintains a stable outlook on Australia’s banking sector in 2016, as slower profit growth and modest asset-quality pressure is expected to be offset by strengthened captalisation and tightened underwriting standards.

On the other hand, Fitch says the country’s household debt will likely remain high this year, resulting in sensitive borrowers responding to rising unemployment and interest rates.

“House prices will remain high relative to peer countries, but we expect house-price growth to moderate after 18 months of unsustainable growth in some Australian cities. Economic growth is likely to benefit from stronger household spending, which could either reduce Australia's savings rate or increase household debt,” Fitch said.

Fitch adds that it expects Australia’s credit cycle to turn in 2016, although asset quality weakness should remain manageable.

“Credit standards are likely to have improved following the Australian Prudential Regulatory Authority (APRA) review in early 2015. Banks have already made significant changes in borrower-serviceability assessment, and limited annual growth in investor mortgages,” Fitch said.

Additionally, Fitch said capitalisation will also remain solid, especially on the backdrop of APRA’s requirement to ensure the strength of banks.

“We expect the banks to continue to strengthen their capital positions especially in preparation of the implementation of higher risk-weightings on residential mortgages on 1 July 2016. The new capital regulation is likely to result in a decline of regulatory capital ratios of the four major banks but we expect the ratios to recover, benefiting from high levels of retained earnings. Capitalisation could also benefit from slowing risk-weighted asset growth and the sale of non-core assets in 2016,” Fitch says.

“Australian banks are likely to remain reliant on wholesale funding markets due to a general lack of deposits in the system. However, the banks are likely to focus on lengthening the maturity of their wholesale funding instruments and attracting high-quality deposits,” they added.