Major banks cop COVID-19 ratings downgrade

8 April 2020

Australia’s major banks have all taken a hit from ratings house, Fitch reflecting the impact of Coronavirus and notwithstanding Government guarantees.

In an analysis released this week, Fitch said it had revised the outlook on the operating environment score for banks in both Australia (AA-) and New Zealand (A) to negative from stable as part of the action. The ratings apply to Westpac, NAB, ANZ, and the Commonwealth Bank.

The ratings agency said it expected gross domestic product (GDP) to shrink in both markets in 1H20, with only a modest recovery starting in 2H20 and extending into 2021.

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“Unemployment is likely to spike sharply and remain very elevated relative to pre-pandemic levels even after the recovery is underway. The current operating environment scores incorporate this base case and the outlook on this factor would likely be revised to stable should the baseline case scenario eventuate,” it said.

“We expect these conditions to affect asset quality and earnings in particular, with the mid-points of both factors reduced by a notch for the large Australian banks, with negative factor outlooks,” the Fitch analysis said.

“Support measures implemented by the government, regulators and banks themselves should alleviate some of the asset-quality pressure that will emerge from this downturn, particularly within the next six to 12 months."

“However, we expect that a portion of businesses will fail to restart once the recovery begins and some households will not be able to resume debt repayments after the repayment holidays provided by the banks,” it said. “As a result, asset-quality metrics will likely weaken from current levels over the next 12-18 months and, for the four large Australian banks, we expect them to no longer be consistent with an 'AA-' factor score.”

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