Banks 'well capitalised' to absorb shocks

With $19 billion of common equity capital raised in 2015, Australia's banks are well placed to absorb any "adverse shocks" as signs emerge that the credit cycle is turning, says Moody's Investors Service.

The asset quality of the Australian banking sector deteriorated “mildly” from a “very strong” position in the full-year period ending 31 March 2016, said Moody’s Investors Service in a May 2016 Asset Quality and Capital Monitor update.

The deterioration of the banks’ asset quality is down to a handful of large, single-name corporate loan impairments in the four major banks, said Moody’s.

“Excluding these single-name impairments, the overall asset quality trend remained benign,” said the report.

“Looking ahead, we expect overall asset quality will continue to be supported by a declining interest rate trend and stable employment.

“Nevertheless, gradual pressure is likely to be exerted by multiple headwinds, including potential further stress in resources-related sectors and regions as a result of lower commodity prices and declining investment,” said Moody’s.

The worsening outlook for residential property developments represents an additional headache for the banks, with increased settlement risk due to reduced fund flows from China and tighter bank lending criteria.

The continued stress in the dairy sector is also disproportionately affecting the Australian banks’ New Zealand subsidiaries, said Moody’s.

“Positively, Australian banks are increasingly well capitalized to absorb any adverse shocks,” said the report.

“The major banks raised around AU$19 billion of common equity capital in 2015.

“We expect that the banks will continue to build capital as APRA begins to implement the ‘Basel IV’ regulatory proposals made by the Basel Committee on Banking Supervision,” said the ratings house.