Moody's: Australian banking system stable, but challenges apparent
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Announcement:

Moody's: Australian banking system stable, but challenges apparent

Global Credit Research - 01 Dec 2011

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.

********************

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Patrick Winsbury
Senior Vice President
Financial Institutions Group
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody's: Australian banking system stable, but challenges apparent
No Related Data.

© 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.


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