Asset quality a challenge for Australian banks, says Fitch

Fitch Ratings said on Tuesday after its semi-annual review of the major Australian banks that asset quality would be the key challenge in 2009. "While the impaired asset levels of Australian banks have risen during 2008, mainly driven by a small number of large corporate collapses, in general they remain low by international standards," Associate Director in Fitch's Financial Institutions Group Tim Roche said. "Fitch expects broader asset quality deterioration in 2009, particularly in consumer portfolios, as unemployment levels rise due to the economic slowdown," Roche said. Fitch said it believed corporate loan books posed the largest risk. "This view reflects the relatively conservative nature of Australian banks' mortgage portfolios, in particular the generally low loan-to-valuation ratios across the portfolios and the use of lenders' mortgage insurance, compared with the relatively large single-name exposures that exist in corporate loan books."

Financial performance was likely to remain robust in the first half of the 2009 financial year due to solid revenue growth and good expense management, which should provide a buffer against increased bad debt charges. Funding had benefited from an Australian government guarantee on deposits and wholesale funding, Fitch said. "Capital positions have been strengthened through ordinary equity placements, with all four major banks reporting Tier 1 ratios in excess of 8% at 31 December 2008," Fitch said, adding banks had generally maintained significantly higher liquid assets to provide a buffer. * This article was first published yesterday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.