Fitch lowers banks’ outlook from stable to negative

The Australian 12:00am December 10, 2016

Scott Murdoch

Australian banks have been warned that consumers are becoming increasingly sensitive to interest rate decisions and that a potential house price fall could threaten the sector’s future profits.

In a regional report, ratings agency Fitch downgraded the banks’ outlook from stable to negative and said the Australian residential property was one of the sector’s biggest risks in the year ahead, especially if the Reserve Bank started to raise interest rates.

Fitch analyst Andrea Jaehne said the banks were likely to record lower profits in 2017 and cost savings could be offset by the sector having to spend more on improving technology.

“Household debt is high and rising relative to disposable incomes, making borrowers sensitive to changes in the labour market and interest rates,” she said.

“We expect Australian house prices to remain high relative to peer countries. Growth is likely to moderate, though, as a large number of newly built apartments will come on to the market over the next 12 to 18 months ... creating a potential oversupply.

“Tighter underwriting standards could increase settlement risk, affecting property development exposures.”

Ms Jaehne said the direction of residential house prices, especially in the capital cities, was vital for the banks’ profit growth for the year ahead.

“The build up of property risk which has prompted some regulatory intervention leaves the banks potentially susceptible to some asset quality deterioration if a more significant price slowdown were to occur considering their significant exposures to residential mortgages.”

Meanwhile, property investors are providing most of the momentum in the residential housing market with an increase in finance demand during October.

The Australian Bureau of Statistics revealed the number of owner-occupier loan approvals fell by 0.8 per cent in the month, compared to September, and are off 4.3 per cent over the past year.

However, investor approvals rose 0.7 per cent and have increased 16 per cent since the low point was reached in May.

CBA economist Kristina Clifton said investors were driving the demand for residential property after the RBA’s interest rate cuts in May and August pushed down borrowing rates.

However, most of the major banks have increased investment lending rates in the past week, blaming uncertain funding market conditions for the move.

The value of the new loans granted in the month was $18.63 billion, a six-month low. The number of owner-occupiers loans fell in NSW, Victoria and WA but increased in Queensland, South Australia and Tasmania.

“The two interest rate cuts this year have reduced financing costs and increased the attractiveness of property investment,” Ms Clifton said.

“On the other hand, approvals to owner-occupiers are slowing and first-home buyers continue to account for a smaller share of new loans.”

St George senior economist Janu Chan said the housing finance demand meant house prices should remain stable heading into 2017. “The RBA has been relatively relaxed about the state of the housing market, and the data confirms a moderation in housing conditions from earlier years.

“That said, home loans remain at a high level and suggest that housing demand is still elevated. This would continue to provide support to house prices.”