Feeble asset quality, credit growth squeeze big Aussie banks

The full impact of the pandemic is yet to materialise.

Australia’s major banks increasingly got squeezed by weaker asset quality, profitability and capital during the June quarter as the pandemic raged on, according to a Moody’s Investors Service report.

All four have seen a surge in non-performing loans, but the full impact of the pandemic will only materialise by the end of March 2021 when the loan forbearance expires, said analyst Daniel Yu.

"Significant downside risk remains in the form of extended economic disruption, which would test the sufficiency of the banks' already strengthened loan loss reserves and drive up credit costs," Yu added.

Stringent lending criteria will stifle growth in housing loans whilst feeble household confidence will quash credit demand. Surge in business loans has dwindled since March and is likely to remain weak due to the economic slump, whilst low interest rates and intense lending competition will keep net interest margins (NIMs) under pressure.

Weak loan growth and NIM contraction will constrain revenue growth amid increasing credit costs. Although the four banks' capitalisation remained strong during the June quarter, it will come under pressure as deterioration in asset quality will drive increases in credit risk-weighted assets, whilst internal capital generation will weaken in line with revenue growth, Moody’s concluded.