Banks ‘well capitalised’ to absorb shocks

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

According to Moody’s, the asset quality of the Australian banking sector deteriorated “mildly" from a “very strong” position in the full-year period ending 31 March 2016, primarily due to a handful of large, single-name corporate loan impairments in the major banks.

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

“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.”

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.

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

“Positively, Australian banks are increasingly well capitalised to absorb any adverse shocks,” it said.

“The major banks raised around $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.”

[Related: Major banks could offload local subsidiaries]

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