In its half-year banking outlook, ratings agency Standard & Poors has handed the Australian sector a positive report card. This is very much in line with S&P's global outlook for banks, which remains steady for most regions. As of 30 June 30, about 75 per cent of its bank rating outlooks were stable, and up to 85 per cent in the APAC region.
Crucially, the earnings of Australian banks should stay strong relative to global peers.
The Australian banking sector faces reduced industry risks through the adoption of simplified business models, along with advances in risk management, and "continued strengthening of institutional and governance standards in the Australian banking sector".
Among other favourable points was an expectation from S&P that credit losses should remain low over the next two years, at about pre-pandemic levels of 15 basis points: "We believe that relatively low unemployment, modest economic growth, and a change in spending patterns will shield borrowers against a rising interest burden," the report stated.
Continued conservative underwriting standards and rational pricing for risks from Australia's banks will afford the sector some buffer for unexpected situations.
Nevertheless, interest-rate cuts and "the persistent disparity between housing demand and supply are likely to keep growth in house prices above the inflation rate".
"We consider the risk of regulatory lapses to be low," S&P added.
However, economic uncertainties cannot be ignored: "Australian banks are exposed to risks from rising consumer prices, high interest rates, fragile business and consumer confidence, and an uncertain global economic outlook.
"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. ... Nevertheless, we consider such borrowers form a small part of the banks' loan books."
And on the technology front, cyber threats continue to present a risk for Australian banks.
"Accelerated digitalisation has increased such risks and could lead to more severe cyberattacks that trigger higher losses," S&P warned.
S&P's analysts also threw in a few other specific predictions of their own:
Sector-average growth in loans:
• 2024 estimate: 4.0 per cent
• 2025 forecast: 5.0 per cent
Nonperforming assets as a percentage of system wide loans:
• 2024 estimate: 0.9 per cent
• 2025 forecast: 0.9 per cent
Sector-average return on average assets:
• 2024 estimate: 0.6 per cent
• 2025 forecast: 0.6 per cent
These strengths have been recognised across the Tasman, where the four major banks' subsidiaries account for 90 per cent of New Zealand banking assets. S&P's assessment remains that NZ's major banks "remain highly likely to receive timely financial support from their Australian parents, if needed."
"This will support the credit quality of the New Zealand major banks."
New Zealand banks should be able to maintain their return on equity at 11 to 12 per cent over the next two years without any need to take undue risk, including aggressive pricing.
The national economies, though, are following different paths. For NZ, according to the S&P report, "economic imbalances remain elevated notwithstanding a mild recovery in property prices in recent months." (House prices declined 10 per cent in fiscal 2023, since then have appreciated by about 1 per cent in the 11 months to 31 May).
New Zealand banks' credit losses will likely remain low over the next two years. "We estimate they will rise to about 15 basis points in fiscal 2024, then stabilise over the next two years," S&P reported.
"This is off the back of lower growth and net interest margins and higher credit costs. We project private sector credit growth to slow to 1.5 per cent in fiscal 2024 before recovering slightly to 3 per cent in fiscal 2025, below its 5 per cent long-term average."
Sector-average loans growth (actual 2.8 per cent 2023):
2024 estimate: 1.5 per cent
2025 forecast: 3.0 per cent
Nonperforming assets as a per cent of system wide loans (2023 actual 0.5 per cent)
2024 estimate: 0.7 per cent
2025 forecast: 0.6 per cent
Sector-average return on average assets 1.1 per cent 2023 actual):
2024 estimate: 1.1 per cent
2025 forecast: 1.1 per cent .