Moody's has stable outlook for Australian banking system

Moody's has issued a stable outlook assessment of the Australian banking system, saying bad debt provisioning had peaked and the outlook for the Australian economy was sound. Australia's big four banks (Commonwealth Bank of Australia, ANZ, Westpac and National Australia Bank) own our big four banks (ASB, ANZ-National, Westpac and BNZ respectively.) However, Moody's said it had a negative outlook for the big four banks based on their reliance on wholesale (hot money) funding. Although it said plans being outlined in the Basle III regulatory process should address these concerns. Here is the full release below from Moody's.

Moody's Investors Service says it has a stable industry outlook for the Australian banking system, reflecting the relatively sound prospects for the domestic economy, improved competitive conditions and signs that bad debt provisioning is peaking. "Australia's banks have come through the global financial crisis in strong condition relative to many developed markets," says Patrick Winsbury, a Moody's Senior Vice President. "As a consequence, the majority of Australian financial institution ratings have not changed and the system remains one of the highest-rated globally." Winsbury was speaking on the release of Moody's latest update -- which he authored -- on the Australian banking system. The system has a weighted average bank financial strength rating of B, while the weighted averages for its long-term, local and foreign currency, senior unsecured obligations are both Aa1. "Bad debt provisions are showing signs of peaking and have remained within our tolerance levels for current bank ratings," says Winsbury. "Moreover, because the banks have substantially increased their capital levels and pre-provision profits have held up well, their ratings have a fair measure of resilience -- from a pure asset-quality perspective -- to any economic 'double-dip' scenario, which anyway is not our expected outcome," adds Winsbury. Indeed, the withdrawal in March of the government guarantee program for bank debt -- implemented during the height of the GFC -- is a good demonstration of the robust state of the domestic financial system, the report says. Furthermore, it had been introduced primarily as a competitive response to other countries' support of their banks, not because of major asset quality weakness. Winsbury's report notes the divergence between the negative ratings outlook for Australia's major banks and the stable industry outlook, which specifically looks at the likely direction of fundamental credit conditions in the sector over the next 12-18 months. The negative ratings outlook is based on the structural reliance of the large banks on wholesale funding, and the assessment that such a funding profile increases their sensitivity to an exogenous shock. At the same time, the proposal by the Basel Committee on Banking Supervision to require increased "stable funding" and liquid asset holdings directly addresses this issue. Although the proposal carries increased costs, there is a reasonable possibility that from a rating perspective -- and absent any additional downward pressure on bank margins arising from increased competition -- the financial burden could be offset by the improvement in the major banks' liquidity profiles, the Moody's report says. Meanwhile the ratings outlooks for the rated regional banks and building societies are overwhelmingly stable. "There was some consolidation in this sector during the GFC, accelerated by funding pressures, and the remaining institutions were either already primarily deposit-funded before the crisis, or have successfully adapted since to the tight wholesale market conditions," says Winsbury. While there are signs of life in the RMBS market, the limited availability and higher cost of wholesale funding appear likely to continue to impose some constraints on growth and profitability of regional banks and building societies. This has no immediate rating implications but could become an issue if prolonged, the report says.