Australian banks report lowest profitability since 2009

Australia's banks are the least profitable they have been since the global financial crisis, with ratings agency Moody's warning things will get worse later this year.

In its summary of the big four banks' latest profit results, analysts from UBS said adjusted return-on-equity (ROE), a key measure of profitability, was 14.9 per cent.

That's down from 15.7 per cent last year, and the worst result since 2009.

While the UBS bank analysts believe the sector remains strong, they also noted that "there are limited prospects for growth or higher returns over the short to medium term", and there is the chance of further profit hits.

"We see a realistic chance of share prices breaking out on the downside if asset quality weakness broadens, competition intensifies, interest rates fall (towards 1 per cent) or regulatory capital continues to rise," they wrote in their analysis.

The major banks' bad and doubtful debt charges edged up 4 basis points to 0.21 per cent, mainly driven by large individual corporate exposures, such as Arrium, Dick Smith, Peabody and Slater & Gordon.

Bank bad debt charges are rising    Moody's expects bank bad debt charges to rise back towards average levels. (Moody's)

The increase in corporate bad debts also caught the attention of ratings agency Moody's, from which the big four banks currently have stable Aa2 ratings.

It has noted the more difficult operating conditions facing Australia's big banks given deteriorating credit quality amongst some large corporations.

"Looking ahead, we expect the asset quality of Australian banks to come under further pressure due to multiple headwinds, including potential further stress in resources-related sectors and regions, a worsening outlook for residential property developments, and continued stress in the New Zealand dairy sector," Moody's analysts wrote in a note.

"Although these pressures currently appear moderate, we expect the banks' credit metrics to deteriorate gradually over the rest of 2016."

Above-average returns from consumer loans insulate banks

While Moody's, like UBS, expects the major banks to struggle to grow their profits this year, it is also predicting that the bank's highly profitable consumer business (mainly home lending) will insulate them.

"During the first half of 2016 (financial year), the retail banking divisions were characterised by improving NIMs [net interest margins] on the back of residential mortgage re-pricing," Moody's observed.

Major bank resources sector exposures  The big four banks have been trying to reduce their exposure to resources firms. (Moody's)

"Divisional returns on equity remain above average despite a reduction due to increases in capital levels. For example, Westpac's ROE for its consumer & business operations is 16.1 per cent, higher than the bank's overall ROE of 14.2 per cent.

"Similar trends can be observed for the other three banks. The performance of the consumer franchises underpins the banks' solid earnings results."

As a result of the perceived strength of the banks' dominnt home loan portfolios, which Moody's added is underpinned further by last week's additional cut in interest rates, the ratings agency believes a credit rating downgrade is unlikely.

"While the weakened outlook for corporate asset quality could put pressure on the major banks' credit profiles, particularly in the context of their very high ratings, we nevertheless expect the banks to remain strongly credit-worthy on an absolute and through-the-cycle basis," it concluded.

Source: ABC News

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