Australian banks' credit costs to rise moderately - Moody's

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 31, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Bali) - In a Moody's report titled "Heard From the Market: Macroeconomic Risks and Evolving Regulations Dominate Investor Concerns", the rating agency notes that mining regions are starting to see signs of stress as the unwinding of the global commodities cycle continues.

    Official report - Moody's

    Moody's Investors Service says that the unwinding of the global commodities cycle is heightening the macroeconomic risks faced by Australian banks, as the 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," says Ilya Serov, a Moody's Vice President and Senior Credit Officer.

    "These risks are somewhat mitigated by the current low interest rates and the relatively healthy state of Australian corporate balance sheets and, on balance, we expect the banks' credit costs to increase only moderately from the current low levels," adds Serov.

    Moody's conclusions were contained in a new report on Australian banks, and which addresses the concerns of the market after Moody's analysts in late November and December 2015 met with over 40 key investors and credit research analysts in the UK, Germany, Switzerland and the US.

    The report is titled, "Heard From the Market: Macroeconomic Risks and Evolving Regulations Dominate Investor Concerns."

    The assessment that risks in Australia's housing market -- which has enjoyed several years of buoyant price growth -- are skewed to the downside poses a challenge to the banks, given that residential mortgages dominate their loan books.

    And while current low interest rates continue to support housing market stability, deepening affordability shortfalls could lead to an eventual adjustment that would better align house price growth with income growth. And although the likelihood of an outright house price correction remains low, tail risks are rising.

    Against this backdrop, Moody's believes that the Australian Prudential Regulatory Authority's (APRA) -- and the banks' -- moves to ensure that underwriting standards in the mortgage market remain prudent is an important positive.

    Moody's further expects forthcoming discussions by APRA on a domestic version of the total loss-absorbing capacity (TLAC) framework to 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' ratings would 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.

    There is currently no statutory bail-in regime in Australia, and local authorities have thus far adopted a cautious and nuanced public stance on this issue.

    Moody's further says that, given the rising risks in the housing market, investors are increasingly focused on the banks' ability to absorb adverse shocks. In this context, mortgage insurance companies are the first 'line of defence' in the mortgage market, and their financial profiles -- in particular their capital levels -- are an important consideration for Australian bank investors.

    Currently, such companies remain financially sound and, from a stress-testing perspective, their 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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