Fitch Ratings has revised the outlook for the four large Australian banks to Stable from Negative.

A significant and sustainable improvement in the prospects for the core markets in which Australia’s four largest banking groups operate was the key driver in the revision of the rating.

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Australia has handled the health crisis associated with the Covid-19 pandemic well, which has resulted in a relatively sound economic performance, reducing downside risks to bank asset quality.

Deterioration should be “manageable”

“We still expect asset quality metrics to weaken through 2021 for the four banks – Australia and New Zealand Banking Group Limited (A+/Stable), Commonwealth Bank of Australia (A+/Stable), National Australia Bank Limited (A+/Stable) and Westpac Banking Corporation (A+/Stable),” Fitch said.

However, the improved economic prospects mean deterioration should be manageable for the banks, the rating agency added.

“This should in turn support earnings in 2021 as we expect some of the provisions raised in 2020 will be released.”

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Earnings pressure associated with low interest rates is likely to persist over the longer term and we expect costs to remain a focus as a result.

Capital ratio should improve

Capital and funding positions are likely to moderate through 2021 following substantial strengthening in 2020.

“We expect capital ratios to move back towards the regulator’s ‘unquestionably strong’ benchmark, most likely through returns to shareholders, possibly beginning in the second half of 2021.”

Some of the improvement in the loan/deposit ratios achieved in 2020 is likely to unwind as consumption increases and loan growth picks up, but “we expect a portion to be sustained in the longer term,” Fitch said.