‘Negative’ credit conditions expected from RC: Moody’s

In an in-depth report on the Australian banking sector released on Thursday, Moody’s Investors Service analyst Daniel Yu warned that risks are rising for domestic mortgage providers.

“Profitability remains healthy but will face increasing challenges,” Mr Yu said.

“Bank profit remained supported by low impairment charges and ongoing benefit from earlier re-pricing of some mortgage products. However, we expect margins to remain under pressure, given that slower credit growth in the next 18 months could intensify competition at a time when wholesale funding costs are likely to rise.”

ANZ and NAB have already reported declines in their net interest margins.

Mr Yu warned that credit implications from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry are negative.

“We expect the financial impact from potential penalties to be manageable in the context of the banking sector’s very strong profitability,” the analyst said.

“That said, the increased focus on bank lending practices could lead to a tightening of mortgage underwriting which could weaken credit growth and profitability.”

The commission is due to issue an interim report by 30 September 2018 and its final report by 1 February 2019, with further evidence and testimony to be heard.

“While it is difficult to predict what the final recommendations from the commission will be, we expect the main issues the recommendations will address will be potential civil penalties, customer redress and enhanced oversight and enforcement powers for regulatory bodies,” Mr Yu said. “How these potential recommendations will impact the credit profiles of financial institutions will depend on the severity of potential fines and breadth of customer redress required.”

[Related: Lending curbs to see average Sydney deposit hit $369,542]