Moody's: Australian banks' asset quality stable for now

Moody's Investors Service says that Australian banks reported exceptionally low credit costs over the six months to 31 March 2015. The rating agency identifies some potential headwinds to asset quality, but expects that in 2015 they will continue be moderated by Australia's record low interest rates. Looking further ahead, bank credit profiles will be supported by likely improvements in their capitalization.

"We expect some moderate pressure on asset quality due to the effects of economic transition from resources sector-led investments to other sources of growth," says Maadhavi Ramanayake, a Moody's Associate Analyst.

Moody's analysis is contained in its just-released report titled "Australian Bank Asset Quality and Capital: Stable for Now, But Potential Headwinds Ahead," and is authored by Ramanayake.

"Corporate problem loans have declined, but past due loans remain stable, and at a higher level than before the GFC," says Ramanayake, "which is perhaps a reflection of the transition underway in Australia's economy."

The report notes that robust loan growth for investor housing, accompanied by rapid house price appreciation in inner Sydney and Melbourne is weakening the average loan portfolio quality of Australian banks.

Moody's therefore views as credit-positive regulatory actions to cool investor housing taken by the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investment Commission (ASIC), but notes that their impact is not yet clearly visible in the data. Nevertheless, in recent weeks, Australian banks have tightened their already quite conservative lending and underwriting practices in response.

Moody's report further expects that improvements in bank capitalization will provide an important counterweight to future asset quality pressures. Likely increases in risk-weightings, in particular for residential mortgages, will improve the quality of bank capital. At the same time, higher capital ratio requirements also appear likely, in light of recommendations by Australia's independent Financial Services Inquiry.