Australian bank asset quality deteriorated mildly from an “exceptionally strong” position during the second half of 2016, according to a new report by Moody’s.
While low interest rates and stable employment will continue to support the assets of the major banks, gradual pressure is beginning to mount, the ratings house said.
Further stress in resource-related sectors and regions of Australia will see banks’ assets continue to weaken, driven primarily by declining investment and lower commodity prices.
In addition, the rising settlement risk for residential property developments, driven by tighter lending criteria and reduced fund flows from China, will weigh on the quality of bank assets, Moody’s said.
Finally, continued stress in the dairy sector is disproportionately affecting the major banks’ New Zealand subsidiaries.
However, Moody’s said the banks are working to mitigate the headwinds by tightening their lending criteria to the aforementioned sectors as well as increasing provisioning in anticipation of further deterioration.
“The major banks are also less likely to be exposed to foreign shocks, which could impact asset quality, following the reduction in their international exposures to Asia and the United Kingdom,” the ratings house said.
“On a positive note, Australian banks are increasingly well capitalised to absorb any adverse shocks, as evidenced by APRA’s implementation of higher residential mortgage credit risk weights for the banks using the advanced internal ratings-based (AIRB) model for capital calculations starting on 1 July 2016.
“The major banks use AIRB and their capital ratios were neutralised as a result of their capital raisings in 2015.”
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