“Difficult year ahead” for region’s financial institutions

Australia’s banks “remain vulnerable” to housing downturn

“Difficult year ahead” for region’s financial institutions


By Melanie Mingas

Australian banks “remain vulnerable to a large and rapid fall in property prices” as financial institutions across the region brace for a “more difficult year” according to global ratings agency S&P.

In its Q1 monitor report, the agency predicts “higher interest rates, as well as volatile domestic currencies, bond markets, and property prices”, will drive headwinds across the region.

Further, while regional bank ratings are set to continue the stability seen in 2018 a “significant and abrupt credit cycle downturn” could see some of the region’s portfolio of 200 rated institutions downgraded. Currently 87% are rated BBB or higher.

"[This] would likely result in negative ratings momentum for some Asia-Pacific banks. This is despite our expectation that most banks can contend with a moderate and gradual negative turn in the credit cycle at current rating levels," said S&P credit analyst Gavin Gunning.

While the report downplays the likelihood of a “disorderly fall in property prices”, it does acknowledge that an “ordered” decline is underway – and is set to continue for the next 12 months.

“A sharp correction, if accompanied by broader macroeconomic weakening, would very likely hurt the banks,” the report stated.

“At the same time, based on our forecast for continued good economic growth, immigration-driven population growth, low unemployment, and low interest rates, we consider that a disorderly fall in property prices remains unlikely,” it continued.

Despite the positivity, Australia’s property market made global headlines this month when Fitch Ratings predicted house prices could see the biggest decline of 24 top global markets in 2019.

Fitch calculates that, following the 6.7% national average peak to trough decline of last year, prices could decline a further 5% this year.

Looking ahead to 2019, CoreLogic predicts home values will continue to fall as tight credit conditions continue, and the unit market will also experience weaker conditions. Meanwhile, lifestyle markets outside the capitals are likely to continue to see increased demand as more people look to escape major cities.

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