Sydney, December 01, 2011 -- Moody's Investors Service says it is maintaining its stable outlook
for the Australian banking system, given the strength of both the
banks' fundamentals and the domestic economy, but various
challenges are apparent, including the question of possible contagion
from the European sovereign crisis.
"Australia's banks have built sizeable capital buffers to
absorb possible weakness in asset quality, and they have a good
measure of flexibility to deal with the challenging conditions in the
international wholesale funding markets," says Patrick Winsbury,
a Moody's Senior Vice President.
"Moreover, the banks' earnings are set to remain resilient,
while their solid levels of capitalization mean they are positioned to
absorb a broad range of downside scenarios," says Winsbury.
"We also note the favorable nature of the deposit environment and
a creditor-friendly regulatory environment."
"From a macro-perspective, the stable outlook also
enjoys support from the strength of the economy. The economy remains
fundamentally solid because of low unemployment and healthy wage growth.
Growth prospects are favorable in 2012 as mining investment strengthens.
Private consumption will continue to grow, albeit at a slower pace
than experienced in recent years. This dynamic will support the
banks' earnings and asset quality, although we anticipate
pockets of deterioration in some business lines," says Winsbury.
"The stable outlook also reflects our analysis that Australia has
good monetary and fiscal policy flexibility to deal with weaker economic
conditions, and the floating currency has proven an effective stabilizer,"
says Winsbury.
At the same time, the Australian banking system faces various crucial
challenges over the next 12-18 months, although the banks
enter this period with much stronger balance sheets than during the aftermath
of Lehman Brothers' collapse in 2008.
First, there is the question of how severe and how protracted any
contagion from the European sovereign crisis may be. This could
increase bank funding costs, reduce international investor demand
for Australian bank debt and slow global economic growth.
The relative importance of resources sector investment and exports,
and the dependence of the banking system on external wholesale funding,
increase sensitivity to exogenous shocks. At the same time,
household leverage and house prices are high by global standards,
increasing system sensitivity to increases in unemployment and interest
rates, and/or a contraction in bank lending.
"While we continue to view the Australian banking system's
relatively high proportion of offshore wholesale funding to be a structural
sensitivity, customer deposits have been growing faster than loans
as deleveraging continues, allowing the major banks to reduce their
reliance on offshore wholesale funding," comments Winsbury.
Additionally, the banks have good access to their domestic debt
market, supported by the low level of government bond issuance and
the fact that their bonds are repo-eligible with the Reserve Bank
of Australia (RBA). In case of a severe wholesale market dislocation,
the banks' liquidity positions are very much higher than in the
past, and the RBA's repo facilities also offer a predictable
and well-tested source of funding.
The second challenge is that, if operating conditions hold up,
then interest rates are likely to remain high and the currency strong,
creating asset quality pressures on non-resource-related
sectors of the economy. The longer-term structural changes
associated with increased investment in the resource sector are likely
to pressure certain industries and regions, keeping credit impairment
levels above the extreme lows of the pre-crisis period.
Looking more to the medium-term, meeting minimum Basel III
liquidity ratios will require a meaningful adjustment by the banks.
In this context, the RBA's Committed Liquidity Facility is
a solution to the structural inability of Australian banks to meet the
LCR requirement. But, the Australian Prudential Regulation
Authority nevertheless expects the banks to restructure their balance
sheets so as to minimize their reliance on the RBA facility.
While more extreme, creditor-unfriendly initiatives,
such as bail-in legislation, do not appear to be high on
the policy agenda, it remains to be seen as to what degree Australia
will diverge from G20 / Financial Stability Board initiatives to reduce
systemic support for banks.
Winsbury was speaking on the release of Moody's latest banking system
outlook for Australia, and which he authored. Moody's
rates a total of 15 banks in Australia.
The Australian banking system is rated one of the highest in the world,
with a weighted average rating of Aa2. This reflects the banks'
strong risk-adjusted profitability and franchise power after a
period of consolidation. They also have solid common equity bases
that will allow them to transition early to the regulator's tougher-than-standard
Basel III capital requirements.
The report is entitled Banking System Outlook: Australia.
It can be found at www.moodys.com.
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Moody's: Australian banking system stable, but challenges apparent