Fitch cautiously optimistic on Aussie banks
Ratings agency Fitch released its Australian bank sector review saying the big four were emerging from the financial crisis in relatively good shape. However, the agency noted that they still face a number of challenges, with a key one being asset quality.
Tim Roche, Director in Fitch's Financial Institutions Group, said impaired assets rose significantly during 2009, at a time of considerable fiscal stimulus and emergency low monetary policy settings.
“As interest rates rise towards a more neutral setting and government stimulus measures are progressively wound back, asset quality may be further tested," Mr Roche cautioned.
Fitch notes however that, though elevated, gross impaired loans remain low relative to off-shore peers, at around 1% of gross loans.
Furthermore, pre-impairment operating profit has continued to rise which, when combined with loan-loss reserves, offers a substantial capacity to absorb further impairments before impacting capital.
From a funding perspective, Fitch said Australia's persistently high current account deficit is largely funded by the nation's banking system.
“This is reflected in the major banks' high reliance on off-shore wholesale markets, and highlights the importance of the government guarantee on wholesale funding introduced in 2008,” the ratings agency said.
Notably, the portion of short-term wholesale funding in the overall mix has diminished during the global financial crisis.
Fitch considers that this may be a precursor to more conservative funding mixes and maturity profiles, particularly in light of the more onerous regulatory capital and liquidity requirements currently under proposal.
Finally, the ratings agency said uncertainty and volatility continued to influence the major banks' operating environment.
Fitch notes a level of concentration risk evident in the banks' exposures to the Australian economy, which in turn is benefiting from growth in Asia, China in particular.
“While this contributed to a relatively stable bank performance throughout the global financial crisis, it constitutes a concentration risk nonetheless,” the ratings agency said.
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