Fitch says earnings at Australia's big banks seen hurt by slower credit growth

(Reuters) - Fitch Ratings said on Wednesday it expected the short-term earnings of Australia’s ‘big four’ banks to come under pressure due to slower credit growth.

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“Credit growth, especially in the residential mortgage segment, is slowing and non-interest revenue is likely to remain stagnant or decrease,” Fitch Ratings said.

The banks would have to raise lending margins to maintain profitability, though that remained a challenging prospect in the face of an inquiry into the financial sector, the rating agency said.

Australia’s biggest banks are imposing stricter lending conditions on borrowers as damaging disclosures at the Royal Commission into financial-sector misconduct prompt fears the economy will be the victim of a new era of subdued credit growth.

Australia and New Zealand Banking Group ANZ.AX said last week revenue growth would slow in the wake of inquiry, which has revealed sweeping irregularity in lending practices, as tighter regulation makes it harder for customers to borrow money.

In its 2018 budget, the Australian government flagged a possibility that household spending might be affected by any unanticipated tightening in financial conditions, possibly as a consequence of the Royal Commission.

Australia has an oligopoly banking system - with ANZ, Commonwealth Bank of Australia, Westpac Banking Corp and National Australia Bank making up the so-called “Big Four” - which collectively dominate property, investment and business lending, giving Australians limited options when seeking credit.

The banks withstood the financial crisis, and found ways to increase revenues and profits even during times when regulations were ratcheted up, such as a 2012-13 crackdown on investment and insurance product-selling practices.

But the first few months of the Royal Commission inquiry are creating more than just a reputational hazard, with the practices, structures and market dominance of the banks subjected to unprecedented scrutiny.

New regulatory controls are almost certain to be imposed, as examples of fraud and poor lending controls are revealed.

Reporting by Aditya Soni in Bengaluru; Editing by Darren Schuettler