Bank profits under pressure as loan impairments rise: Moody's

by Julia Corderoy13 Jul 2016
Skyrocketing bank profits and are set to slow as Australia’s big banks face rising loan impairments, Moody’s Investor Service has warned.

Moody's senior vice president, Ilya Serov said banks have faced increasingly difficult operating conditions over recent months, resulting in a “sharp rise – from an exceptionally low base – in large, single-name loan impairments in the banks’ corporate portfolios”.

This pressure on the banks’ asset quality will come from “multiple headwinds”, according to the report released by Moody’s Investor Service, including potential further stress in resources-related sectors and regions and a worsening outlook for residential property developments.

Moody's conclusions in the report are based on the first-half FY2016 financial results of the major banks – ANZ, NAB, Wesptac and CBA

Moody's noted that in the results, the major banks reported higher loan impairments during the first half of 2016, averaging 0.19% of gross loans, up from 0.16% in the second half of 2015. CBA has also reported that its loan impairment rose to 0.25% during its third quarter 2016 reporting period. 

These results suggest that further deterioration, closer towards the long-run average of 0.35-0.40%, is likely.

Additional provisioning for rising loan impairments, alongside record low interest rates, will put bank profitability under increasing pressure over the rest of 2016. 

On the other hand, Moody’s noted that capital levels are likely to “remain stable or improve moderately”, as the banks position themselves in anticipation of likely further regulatory reform.