Aus­tralian banks’ credit costs feared to in­crease

The Pak Banker - - COMPANIES/BOSS -

Ac­cord­ing to Moody's In­vestors Ser­vice, the macroe­co­nomic risks faced by Aus­tralian banks is height­ened by the un­wind­ing of the global com­modi­ties cy­cle as re­gions and sec­tors most ex­posed to min­ing are start­ing to see some signs of stress.

Al­though the banks' di­rect ex­po­sure to the re­sources sec­tor is rel­a­tively low, they face high se­cond-or­der risks from a po­ten­tial sharp down­turn. "Re­flect­ing th­ese pres­sures, we ex­pect Aus­tralian banks' credit costs to in­crease mod­er­ately from cur­rent low lev­els," says Moody's.

Risks in Aus­tralia's hous­ing mar­ket are skewed to the down­side which - given that res­i­den­tial mort­gages dom­i­nate their loan books - poses a chal­lenge to the banks.

The cur­rent low in­ter­est rates con­tinue to sup­port hous­ing mar­ket sta­bil­ity de­spite the re­cent run-up in house prices. How­ever, deep­en­ing af­ford­abil­ity short­falls couldlead to an even­tual ad­just­ment that would bet­ter align house price growth with in­come growth. Al­though the like­li­hood of an out­right house price cor­rec­tion re­mains low, tail risks are ris­ing.

We ex­pect forth­com­ing APRA dis­cus­sions on a do­mes­tic ver­sion of the to­tal loss-ab­sorb­ing ca­pac­ity (TLAC) frame­work will en­com­pass a broader range of bank res­o­lu­tion is­sues, po­ten­tially in­clud­ing se­nior cred­i­tor bail-in, and the in­tro­duc­tion of a 'ju­nior se­nior' class of in­stru­ments.

The im­pact of reg­u­la­tory changes on the banks' rat­ingswould de­pend on the de­gree to which the pos­i­tive im­pact of higher loss-ab­sorp­tion ca­pac­ity would off­set the pos­si­ble re­duc­tion in our as­sess­ment of the like­li­hood of govern­ment sup­port for se­nior obli­ga­tions.

Aus­tralian mort­gage in­sur­ance com­pa­nies re­main fi­nan­cially sound. From a stress-test­ing per­spec­tive, the com­pa­nies' strong cap­i­tal lev­els can with­stand po­ten­tial losses aris­ing from a 'nor­mal re­ces­sion' sce­nario. How­ever, how their port­fo­lios would per­form in more chal­leng­ing times is un­tested. A sharp hous­ing cor­rec­tion, while un­likely, could chal­lenge their credit pro­files.

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