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Research Announcement:

Moody's - Housing loans interest income of Australian banks to remain under pressure

17 April 2019

Sydney, April 17, 2019 --

– Competitive pressure on home loan interest income to persist

– Banks have flexibility to preserve profitability

Moody's Investors Service says that the steady decline in the interest that Australian banks earn on their housing loans has been greater than can be explained by a fall in the official cash rate alone. Slower credit growth and tighter lending criteria have increased competition for lower-risk mortgages. Upcoming regulation requiring increased loan pricing transparency will likely add further impetus to price competition.

"IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."

"The housing loan interest income/average housing loan assets ratio for Australian deposit-taking institutions (ADIs) has been declining steadily for a decade, and the underlying competitive pressures on housing loan profitability will persist through 2019 and into 2010," says Tanya Tang, a Moody's Analyst, in a new report.

"Smaller lenders will be most affected, although the impact is being felt system-wide. Housing loans contribute more than half of the major banks' total lending interest income, and even more for smaller banks and mutual ADIs," says Tang.

However, the banks have flexibility to preserve profitability. One of the offsets is that they have demonstrated their ability to adjust deposit pricing and operating costs to substantially mitigate falling housing loan interest income. The potential for the RBA to lower its cash rate later this year should also offer an opportunity for banks to recoup some margin.

The major banks are better positioned to cope with falling housing loan interest income than the smaller banks and to preserve their bottom-lines, because of their advantages in terms of income diversification, funding and scale.

Furthermore, the risk to bank capitalization remains remote. Moody's stress testing suggests that, in the absence of countermeasures, if the housing loan interest income/average housing loan assets ratio repeats the 10-basis-point decline seen in 2018, then banks' profit before tax will decline by 4%, and the impact on their Common Equity Tier 1 (CET1) ratio will be minimal. For a fall below the minimum regulatory requirements to occur, a drop of 160 basis points would be needed.

Subscribers can access the report, "Financial Institutions – Australia: Housing loan interest income under pressure", at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1168326

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Tanya Tang
Analyst
Financial Institutions Group
Moody's Investors Service Pty. Ltd.
JOURNALISTS: 61 2 9270 8141
Client Service: 852 3551 3077

Patrick Winsbury
Associate Managing Director
Financial Institutions Group
Moody's Investors Service Pty. Ltd.
JOURNALISTS: 61 2 9270 8141
Client Service: 852 3551 3077

Releasing Office :
Moody's Investors Service Pty. Ltd.
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Australia
JOURNALISTS : 61 2 9270 8141
Client Service : 852 3551 3077

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