S&P eyes downside risks for Aussie banks
S&P Global Ratings yesterday warned that the economic upheaval induced by the COVID-19 health crisis has increased the downside risks for Australian property prices and banks.However, the ratings agency suspects that the federal government's decision to prohibit real estate auctions was likely to have only a short term impact on property market activity."Although it is difficult to be definitive in these rapidly changing operating conditions, we currently foresee a downturn in the property sector to be relatively short lived, consistent with our economic forecast that real GDP growth will rebound toward the end of this calendar year and over the summer," the ratings agency said."We estimate that the Australian banks should be able to absorb increased credit losses due to COVID-19 within their annual earnings."S&P believes that recently announced fiscal and monetary stimuli, along with special hardship relief measures from the banking sector, should cushion the blow to property prices.However, the ratings agency noted that risks to banks from home lending were "firmly on the downside"."We expect that despite low interest rates, demand for housing should remain subdued in the short term due to the current travel restrictions, weak consumer sentiment and the wealth effect that comes with falling asset prices," S&P said."In our opinion, the combination of high household debt and house prices exposes the Australian banks to a scenario of a sharp correction in property prices, especially in the economic conditions weakened by COVID-19 outbreak."While S&P said a prolonged economic downturn was outside its "current base case", such a scenario would trigger credit losses significantly above current estimates and weaken the banking sector's creditworthiness.