Australia’s Big Four asset quality deterioration ‘manageable’: Fitch

The country’s improving economic performance reduces downside risks.

Whilst Australia’s four largest banks’ will see their asset quality metrics weaken through 2021, there is now a stronger light at the end of the tunnel as their prospects in core markets have significantly and sustainably improved, reports Fitch Ratings.

The ratings agency still expects the asset quality metrics of Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corporation to weaken throughout the year. But thanks to the country’s improving economic prospects, deterioration should be manageable for the banks.

“Australia has handled the health crisis associated with the Covid-19 pandemic well, which has resulted in a relatively sound economic performance, reducing downside risks to bank asset quality,” Fitch stated.

This should in turn support earnings in 2021 as Fitch expect some of the provisions raised in 2020 will be released.

However, earnings pressure associated with low interest rates is likely to persist over the longer term and Fitch expect costs to remain a focus as a result.

Capital and funding positions are also likely to moderate through 2021 following substantial strengthening in 2020.

“We expect capital ratios to move back towards the regulator's "unquestionably strong" benchmark, most likely through returns to shareholders, possibly beginning in the second half of 2021. Some of the improvement in the loan/deposit ratios achieved in 2020 is likely to unwind as consumption increases and loan growth picks up, but we expect a portion to be sustained in the longer term,” the agency added.