According to the RBA’s Financial Stability Review, which is released semi-annually, the Australian banking system remains in good shape after efforts to strengthen its resilience.
The report pointed out that this is against a backdrop of the banks’ domestic assets performance having “deteriorated a bit” this year from a “very strong” position.
“The weakening has been evident in both banks’ consumer and business lending portfolios, and has been concentrated in mining-related industries and regions … these factors resulted in a marked increase in the charge for bad and doubtful debts in the most recent half,” the report said.
“Rising bad debt charges have, in turn, contributed to bank profits declining recently to levels of around two years ago,” it added.
However, the report highlighted that despite this slight deterioration, Australian banks’ tightening of lending standards has contributed to a slowing in the pace of overall credit growth over the past six months.
“As a consequence, the Australian banks continue to be well placed to address the risks they face,” it said.
The report showed that the major banks have increased their resilience to liquidity shocks over recent years, which will likely be strengthened by the implementation of the Net Stable Funding Ration (NSFR) from 2018.
“Access to long-term debt funding has been favourable for Australian banks this year, and they have used this opportunity to raise considerably more funding from debt markets than in recent years, often at longer tenors,” the report said.
Housing loan performance
The report noted that a deterioration in housing loan performance has been “most pronounced” in Western Australia and Queensland.
However, it stated that the pick-up in the non-performing housing loans ratio has been almost entirely in ‘past-due’ rather than ‘impaired’ loans, which suggests that banks generally expect to recover the full amount of the loans.
“Growth in banks’ domestic loan books has slowed over the past six months, partly reflecting the tightening of standards in some segments,” the report said.
“Future asset performance will largely depend on the evolution of macroeconomic conditions, especially conditions in property markets.
“Nonetheless, the considerable strengthening of housing lending standards over the past year or so should assist with future loan performance,” the report concluded.