Clear skies ahead for Aussie banks as economy improves

Banks can withstand NPL growth due to loan loss reserves.

Australian banks can expect lower asset quality and capital risks as the economy recovers, according to a Moody’s Investors Service report, with their profitability improving as the high loan loss provisions seen in 2020 are unlikely to reoccur.

The country’s economy was able to bounce back come Q3 2020 due to the successful containment of the virus, analysts said. Real GDP growth is projected to hit 3.8% in 2021.

NPL ratios are likely to peak this year, followed by gradual declines as the economy regains strength. Loans subject to repayment moratoriums have dropped to1.4% of total banking system loans as of January 2021.

Banks are well positioned to withstand NPL growth given they have built up significant loan loss reserves in anticipation of a much more severe economic downturn, the report noted.

Low interest rates are still a challenge, but reductions in deposit rates and lower wholesale borrowing costs, will partly offset the impact on profitability. Also, as housing prices rebound, lending growth is likely to pick up from subdued levels.

Profit growth will strengthen banks' organic capital generation, allowing them to maintain high capital ratios. However, capital ratios are unlikely to rise as they are likely to resume dividend payouts at normal levels now that dividend restrictions have been removed.