Fitch Ratings Says Asset Quality Is The Key Challenge For Australian Banks In 2009

Fitch Ratings has commented, following its semi annual review and outlook of the major Australian banks, that asset quality will be the key challenge facing these banks in 2009. "While the impaired asset levels of Australian banks have risen during

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Fitch Ratings has commented, following its semi-annual review and outlook of the major Australian banks, that asset quality will be the key challenge facing these banks 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,” says Tim Roche, associate director in Fitch’s Financial Institutions Group. “Fitch expects broader asset quality deterioration in 2009, particularly in consumer portfolios, as unemployment levels rise due to the economic slowdown.”

Residential mortgages typically account for the largest share of Australian bank loan portfolios but Fitch believes the corporate loan books pose the largest risk of material asset quality issues. 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.

While the risks to asset quality are clearly significant, financial performance is likely to remain robust in H1 of the 2009 financial year due to solid revenue growth and good expense management, which should provide a buffer against increased impairment charges. Funding has benefited from an Australian government guarantee on deposits and wholesale funding. Costs remain elevated but the guarantee has re-established access to wholesale markets following the turmoil of October and November 2008.

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. It should also be noted that the banks have generally maintained significantly higher holdings of liquid assets to provide a buffer against the difficult environment.

Fitch’s ratings for Australia’s four major banks are as follows:

– National Australia Bank: Long-term Issuer Default rating (IDR) ‘AA’/Stable Outlook, Short-term IDR ‘F1+’, Individual ‘B’, Support ‘1’ and Support Rating Floor ‘A-‘ (A minus);

– Commonwealth Bank of Australia: Long-term IDR ‘AA’/Stable Outlook, Short-term IDR ‘F1+’, Individual ‘A/B’, Support ‘1’ and Support Rating Floor ‘A-‘ (A minus);

– Westpac Banking Corporation: Long-term IDR ‘AA-‘ (AA minus)/Rating Watch Positive, Short-term IDR ‘F1+’, Individual ‘B’, Support ‘1’ and Support Rating Floor ‘A-‘ (A minus);

– Australia & New Zealand Banking Group: Long-term IDR ‘AA-‘ (AA minus)/Stable Outlook, Short-term IDR ‘F1+’, Individual ‘B’, Support ‘1’ and Support Rating Floor ‘A-‘ (A minus).

D.C.

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