Fitch Ratings: Remediation Costs to Continue to Weigh on Australian Major Banks' Earnings

(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 07: Fitch Ratings expects earnings and profitability headwinds to persist for Australia's four major banks over 2019 as a result of slowing credit growth, contracting margins, weakening credit environment and the imposition of regulatory and customer remediation costs. Customer remediation costs continued to act as a drag on the half-year performance of the four major banks in Australia - Australia and New Zealand Banking Group Limited (ANZ, AA-/Stable/aa-), Commonwealth Bank of Australia (CBA, AA-/Negative/aa-), National Australia Bank Limited (NAB, AA-/Negative/aa-), and Westpac Banking Corporation (WBC, AA-/Stable/aa-). Further costs are likely as the banks continue to work through their respective remediation programmes. The banks reported an aggregated statutory half-year profit of AUD13.6 billion, a decrease of around 9% from a year earlier, while cash net profit was down 4%. CBA's current financial year will end on 30 June 2019, while ANZ, NAB, and WBC have current financial years that will end on 30 September 2019. As we had expected, net interest margins across the banks generally contracted in 1H19. We also believe they are unlikely to significantly improve in the short term. Slowing system credit growth, particularly in residential mortgages, strong competitive pressures and intense regulatory and public scrutiny of the sector have made it difficult for the banks to reprice their loans to fully absorb higher wholesale funding costs. The low interest rate environment and potential reduction of the cash rate by the Reserve Bank of Australia add to the headwinds. All of the banks have signalled productivity improvements and digital investment as key drivers for longer-term profitability growth - the banks are in the midst of implementing their transformation and simplification programmes, and they have reduced full-time employees in 1H19 and tightened expense management. Fitch believes the benefits of these programmes will support the long-term underlying earnings and profitability profiles of the banks, but the increased investment spending, compliance costs and customer remediation expenses will continue to be challenges in the immediate future. The banks also remain susceptible to fines and class action lawsuits following the findings from the various inquiries into the banking system. The four banks as a whole reported a modest increase in their 90 days plus arrears for residential mortgages, a trend that Fitch believes is likely to continue. This reflects some pressure on household finances and ongoing weak economic performance in Western Australia. The trend of rising credit impairments, from very low prevailing levels should also continue, partly driven by lower write-backs and recoveries. Notwithstanding these trends, the asset quality of the major banks remains very strong in the global context and should continue to be supported by the tightening of their risk appetite and underwriting in recent years. A shock to interest rates or the labour market remains the main risk that would result in more meaningful losses for the banks, but this is not Fitch's base case. Fitch believes the banks are well-positioned to meet the regulator's "unquestionably strong" capital targets by the 1 January 2020 deadline. Three of the four banks' common equity Tier 1 (CET1) ratios were above the 10.5% benchmark at end-1H19, with ANZ being the highest at 11.5%. NAB's was the lowest at 10.4%, but it should not have difficulty in meeting the requirements following an adjustment of its dividend levels, and a discounted and underwritten dividend reinvestment plan in 1H19. The planned divestment of NAB's MLC wealth management business should also support capital, although the bank does not expect this to occur until FY20. Fitch does not believe the federal election in May will have a significant immediate impact on the banks. The two major political parties do not appear to materially differ in their desire to implement most of the recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The banks are already in the process of adopting a number of the recommendations and a change in government is unlikely to impact this. Contact: Jack Do Director Financial Institutions +61 2 8256 0355 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Tim Roche Senior Director Financial Institutions +61 2 8256 0355 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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