Major Australian banks to absorb higher credit losses: report

Credit losses are likely to rise six times from historic lows in 2019.

The Australian banking industry’s credit losses is expected to rise to 85bps of gross loans and advances totaling about $18.9b (A$29b), nearly six-fold from their historic low in 2019, but major lenders should be able to withstand the forecast, according to a S&P Global Ratings report.

Credit losses are likely to ease to about 0.5% of gross loans in FY2020, in line with S&P’s expected long-term average for the banks, on the back of improving economic growth and declining unemployment. However, it could also rise above their base case if the economic slowdown persists or becomes more severe.

Also read: Economic slump will drag Australian banks' loan performance: analysis

Moreover, analysis suggests that major Australian lenders retain significant headroom within their earnings to take in the likely rise in credit losses in conjunction with a large downtick in interest spreads and fee income, the report wrote. 

In addition, major lenders are expected to take measures to elevate the absolute amount of capital that they have by slashing dividend payments and issuing new capital to sustain their regulatory capital ratios, which otherwise would be dampened by credit transactions within the banks’ internal ratings based capital models.

“If we assess the economic risk score within our BICRA for Australia as having worsened, we would apply higher risk weights in our capital analysis to reflect the same, which would result in a weakening in our capital ratios for all banks in Australia. In that scenario, the capital ratios of most rated banks will remain consistent with our current ICRs,” S&P said.

At the same time, the stand-alone credit profiles (SACP) for one or more of the four major Australian banks may weaken in such a scenario, the report noted. A lower SACP for a major lender would result in lower ratings on its tier-1 and tier-2 regulatory capital instruments.

Increased uplift above their SACPs due to likely government support should offset the impact of a one-notch weaker SACP on the issuer credit ratings (ICRs) on the four major banks, the report concluded.

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