Australian banks’ profit growth is likely to slow this year given their significant exposure to residential mortgages, said ratings agency Fitch.
Fitch maintains its negative outlook for the Australian banking sector. It has identified high property prices and household debt as main risks to banks’ performance.
“A significant deterioration in asset quality in the mortgage sector could undermine bank profitability and weaken capitalisation, although this is not our base case,” said Fitch.
Australian banks have a high exposure to property relative to those in other countries. While they have reduced their risk appetite for financing property developments since 2010, the major banks are significantly exposed to residential mortgages, said Fitch analysts.
Residential mortgages accounted for 40% to 60% of the major banks’ respective exposure at default (EAD) at the end of FY2017, with the proportion higher for most regional banks.
Regulators have worked to tighten loan underwriting standards and restrict investment mortgages and interest-only loans. APRA has cracked down on how lenders assess borrowers’ total debts and living expenses, with banks responding with stricter examination of loan applications.
These should offer some protection to banks’ asset quality in case of a housing market downturn, said Fitch.
Fitch expects house prices to remain high relative to other markets, and forecasts modest price increases in 2018.
“Overall, property prices should remain largely stable over the next year, with low interest rates, few alternatives for capital growth, and population growth offset by high household debt, falling rental yields, increasing supply, and rising dwelling completions,” said Fitch analysts.
The high price growths seen in Sydney and Melbourne in recent years increase the risk of a correction in these markets.
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