Major banks dominate with competitive advantages
Australia's financial sector is in good health supporting major banks to deliver good earnings growth, according to Morningstar's quarterly outlook for the Australian share and credit markets.
The report found the sector has increasing earnings momentum, solid balance sheets, and growing dividends. However, it said headwinds are mounting with economic growth sub-trend and increasing global uncertainty weighing on investor confidence.
Despite these challenges banks were found to be good stead and will continue to benefit from strong competitive advantages underpinning increasing profits and attractive dividends.
"We believe the wide economic moats surrounding Australia's four major banks are structural, strong, and durable," Morningstar said.
"We believe the four major banks possess competitive advantages strong enough to deliver global sector-leading returns on equity for the foreseeable future."
The investment house said the highly profitable oligopoly dominating the financial services industry enables the major banks to be more prosperous compared with major banks in other global jurisdictions.
"We were not surprised when Australia's banking regulator, Australian Prudential Regulation Authority, or APRA, confirmed the four major banks are well capitalised and need to be "unquestionably strong," the report said.
However, Morningstar noted that the major banks' adjusted capital adequacy ratios are not in the top quartile of global peers and will need to increase.
"Operating conditions for the banks are supportive of further respectable earnings and dividend growth, with solid credit growth boosting top-line revenue, good deposit growth, broadly stable margins, tight control of operating expenses and , most importantly, benign bad debts," the report said.
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