Australian banks' asset performance mildly deteriorated in 2017: Moody's

Overdue loans grew despite the fall in impaired loans.

Moody's Investors Service says that Australian banks demonstrate improved funding profiles and their capital levels are strong and rising. However, past-due loans have grown, even as impaired loans have fallen.

"The banks' funding gap—as measured by loans not funded by customer deposits—continued to narrow during the six months to 30 September 2017 (the second half of the fiscal year ended 30 September 2017), although at a slower pace," says Tanya Tang, a Moody's Analyst.

Deposit growth slowed, but remained faster than loan growth. "The funding gap will not likely widen meaningfully over the next 12-18 months, because credit growth should moderate, while wholesale issuance volumes will likely decline," adds Tang.

"As for the banks' capital levels, such levels are strong and rising, with the major banks' common equity tier 1 ratios well positioned to meet the new regulatory minimum of 10.5%, which will take effect in January 2020 and fully accommodate the Basel III reforms announced in December 2017," says Maadhavi Ramanayake, a Moody's Associate Analyst.

"However, while the domestic asset performance of Australian banks remains strong on an absolute basis, such performance deteriorated mildly in the six months to 30 September 2017," adds Ramanayake. "Past-due loans grew, despite the fall in impaired loans, underscoring persistent asset risks in the system, in particular, in the property market."

Here’s more from Moody’s:

Moody's says that tighter regulatory measures by the Australian Prudential Regulation Authority slowed the growth of investor and interest-only housing loans. This slowdown moderated house prices in the key markets of Sydney and Melbourne, leading Moody's to anticipate slower housing loan growth in 2018. At the same time, corporate loan demand remains reasonably subdued.

And the banks' access to global term wholesale funding markets remains strong, with issuance costs near historic lows. The major banks will likely issue less wholesale debt in 2018 than in 2016-17, having substantially extended their average funding tenors, in part to position themselves ahead of NFSR implementation in 2018.

However, Moody's points out that while the proportion of short-term funding from overseas has fallen, the Australian system remains substantially exposed to global funding conditions.

On liquidity, Moody's says that the banks show strong liquidity profiles. While banks subject to the liquidity coverage ratio (LCR) requirement reported a lower aggregate ratio for the six months to 30 September 2017 than the high reached in December 2016, their LCR results remained comfortably above the minimum requirement of 100%.

Many of these same banks have indicated publicly that their NSFRs are on track substantially to exceed the 100% minimum requirement which will come into effect on 1 January 2018.

Banking system loan growth stayed stable in the nine months to 30 September 2017. Lending commitments were steady across the housing and personal segments in nominal amounts, while the corporate sector was slightly more volatile. However, housing credit growth slowed, particularly in the riskier interest-only segment. Corporate loan growth also slowed.

Overall loan growth will likely slow because of regulatory measures aimed at reining in riskier types of housing lending, including investor loans, along with stagnating housing prices.

With asset risks, Moody's explains that the four major banks in Australia reported declines in problem loans for the nine months to 30 September 2017, after writing down impaired exposures and tightening lending to vulnerable sectors such as commercial property and resources. However, problem loans at regional banks increased, driven by the growth in past-due loans.

And the ratios of problem loans at the major banks declined, as they reduced exposures to mining, resources and commercial property. Yearly growth in corporate lending commitments remained subdued, except for a spike in May 2017.

Growth in the riskier types of lending slowed during the six months to 30 September 2017, amidst tighter regulatory measures from the Australian Prudential Regulatory Authority. The four major banks have continued to focus on mortgages with low loan/valuation ratios, which will provide them with ample buffers against losses. Problem loan ratios for residential mortgages rose during the same six months, although modestly, and housing prices are still high relative to income levels.