From Moody’s:
Moody’s Investors Service says that the asset quality of Australian banks deteriorated during the six months to 31 March 2016 (1H 2016), but their balance sheets remain well positioned to withstand an adverse shock with improved capital positions. At the same time, funding structures returned towards a greater use of wholesale funding.
“We expect gradual pressure on asset quality will be exerted by multiple headwinds, even as the declining interest rate environment and stable employment conditions continue to act as factors supporting loan repayments,” says Ilya Serov, a Moody’s Senior Vice President. “However, the banks are well capitalized to absorb any losses, and are expected to continue to improve their capital positions further.”
“Meanwhile, the increased use of wholesale funding reflects the greater issuance by the banks of longer-dated securities”, says Frank Mirenzi, a Moody’s Vice President and Senior Analyst. “Their funding mix may also shift further to long-term wholesale debt, as the incoming Basel Net Stable Funding Ratio (NSFR) regime ascribes greater value to debt funding with longer tenors.”
Moody’s conclusions were contained in two new reports: “Australian Bank Asset Quality and Capital: The First Hint of a Turning Credit Cycle”, and “Australian Bank Funding and Liquidity: Major Bank Focus Shifts Back To Wholesale Funding”.
The deterioration in asset quality during 1H 2016 was evidenced by a sharp rise in impairments — although from an exceptionally low base — and dominated by a handful of large corporate exposures in the four Australian major banks’ institutional portfolios. After excluding these single-name impairments, asset quality trends remained benign.
In the months ahead, asset quality is expected to gradually weaken from potential further stress in resources-related sectors and regions, a worsening outlook for residential property developments, and the effects of weak milk prices on the dairy sector. Housing risks also remain elevated, as affordability measures have deteriorated, and recently disbursed mortgages — originated during a period of intense investor borrowing and low interest rates — have not yet seasoned.
However, Australian banks are increasingly well capitalized to absorb any adverse shocks, with the majors having raised a little over AUD19 billion of capital in 2015. Looking ahead, Moody’s expects that the banks will continue to build capital as the Australian Prudential Regulatory Authority (APRA) begins to implement the Basel IV regulatory proposals and ensures that bank capital ratios are set at “unquestionably strong” levels, as recommended by the Financial System Inquiry in December 2014.
With the funding situation, as covered in the second report, Moody’s notes that the major banks’ exposures to global wholesale funding market conditions remain a significant credit rating sensitivity, but their funding composition has undergone significant improvement since the global financial crisis of 2008, as evidenced by a considerably reduced reliance on short-term wholesale funding and more diversified degree of issuance activity.
Liquidity has stabilized at a much higher level, following the implementation of the Basel Liquidity Coverage Ratio (LCR), and the incoming Net Stable Funding Ratio (NSFR) will drive banks to further improve their 12-month liquidity and funding profiles.
