However, economic uncertainties and rising cyber threats remain key risks
Credit losses for Australian banks are expected to stay low over the next two years, hovering around pre-pandemic levels of 15 basis points, according to S&P Global Ratings’ midyear outlook for global banks.
The report attributes this stability to relatively low unemployment, modest economic growth, and shifting spending patterns, which should shield borrowers from rising interest burdens.
According to the data provider, industry risks for Australian banks have reduced, thanks to strengthened institutional and governance standards. Simplified business models and improved risk management have also contributed to the positive outlook.
“We consider the risk of regulatory lapses to be low,” said Nico DeLange (pictured above), primary credit analyst at S&P Global Ratings. “We assess the institutional framework for the banking industry in Australia at the lowest risk level on our scale, in line with that in Canada, Hong Kong, and Singapore.”
Meanwhile, housing affordability constraints, a modest rise in unemployment, and elevated interest rates are expected to moderate house price increases in the country over the next year or two. However, beyond this period, anticipated interest rate cuts and the ongoing disparity between housing demand and supply are likely to drive house price growth above the inflation rate.
“We believe underwriting standards will remain conservative and banks will continue to price rationally for risks, affording the sector some buffer for unexpected situations,” DeLange said. “The earnings of Australian banks should stay strong relative to global peers.”
However, S&P Global Ratings noted that economic uncertainties continue to pose risks.
“Australian banks are exposed to risks from rising consumer prices, high interest rates, fragile business and consumer confidence, and an uncertain global economic outlook,” DeLange said. “Given the large increase in interest rates and prices in the past two years, we consider that some households and businesses will struggle to service their debt.
“Particularly vulnerable will be individuals who lose their employment or income, are highly leveraged, and borrowed when house prices were near their peak. Nevertheless, we consider such borrowers [to] form a small part of the banks’ loan books.”
The report also found technology risks to be increasing. Cyber threats remain a concern, with accelerated digitalisation heightening the risk of severe cyberattacks that could result in higher losses.
Globally, the outlook for banks remains steady. As of June 30, 2024, approximately 75% of bank rating outlooks were stable, supported by solid capitalisation, improved profitability, and sound asset quality.
However, the expected economic slowdown in the second half of the year, combined with elevated interest rates, will test business volumes, asset quality, and financing conditions.
Geopolitical risks, including the Russia-Ukraine and Israel-Hamas conflicts, and numerous general elections in 2024, bring potential market volatility. Nonetheless, most banks’ earnings continue to benefit from high interest rates and limited credit losses.
The commercial real estate (CRE) market remains weak in some jurisdictions, particularly in the US, China, and parts of Europe, with related credit losses increasing but generally manageable.
Credit divergence is expected to persist, with pressure more pronounced for non-bank financial institutions and entities with weak funding profiles or greater exposure to geopolitical, political, or CRE risks.
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