Australia's financial system remains in good shape with well capitalised and profitable banks able to weather an expected increase in loan arrears in the coming year, the country's central bank said on Thursday.
In its semi-annual review of the financial system, the Reserve Bank of Australia (RBA) also said that households had responded to falling wealth by rebuilding savings while business balance sheets were relatively sound overall.
"Unlike in a number of other countries, the Australian banking sector continues to report solid profits, has little exposure to high-risk securities and the largest banks have maintained their high credit ratings," the RBA said.
The relative health of the banking system has allowed banks to pass on much of the RBA's aggressive 400 basis points of easing in monetary policy enacted since September, thus boosting household incomes and making homes more affordable.
The government had also played a part by guaranteeing both deposits and banks' wholesale funding. "These arrangements have been successful in sustaining depositor confidence and in ensuring that Australian banks have continued access to capital market funding," said the RBA.
Since the guarantee came into effect in late November, the banks have issued A$85 billion ($59 billion) in long-term debt, while also extending the average maturity of debt outstanding.
The five largest banks recorded headline profits after tax of a combined A$8 billion in the latest half year. Bad and doubtful debts climbed to a total A$5.3 billion, up from A$1.4 billion a year earlier, though that still represented just 0.5 per cent of assets.
Non-performing assets at the end of 2008 stood at 1 per cent of total assets, up from 0.4 per cent a year earlier, but remained well below the peak of 6 per cent seen in the recession of the early 1990s. Most of the deterioration was seen in business and commercial property loans, while non-performing mortgage loans amounted to just 0.48 per cent of total home debt.
The main downside risk to the performance of banks' housing portfolios is from a rise in unemployment as the economy slows.
The RBA said banks were well capitalised, with the aggregate capital ratio rising 80 basis points to 11.4 per cent in the second half of last year. Much of that came from private equity raisings, with the four largest banks issuing A$18 billion in new equity in the same period.
Banks have also boosted their holdings of liquid assets, like cash, deposits and highly rated securities, by around 75 per cent since the credit crunch first began.
Sound finances have allowed the banks to keep their high credit ratings, with Australia and New Zealand Banking Group , Commonwealth Bank , National Australia Bank and Westpac all rated AA by Standard & Poor's. Only seven of the other top 100 global banking groups have the same or higher rating.
Banks shares have not fared so well, with the index for the whole sector falling by 46 per cent from its peak in November 2007. Still, that was far less than losses suffered in the US or UK, such that the four largest Australian banks now rank in the world's top 30 by market capitalisation with the biggest ranked ninth.
While bank lending growth had slowed, this seemed to be more due to a fall in the demand for loans rather than a tightening in lending standards, the RBA said. Households and business had become much more risk-averse and were curtailing borrowing and paying down debt.
As households were spending less, the ratio of savings to disposable income had jumped to 8.5 per cent in the last quarter of 2008, the highest in more than a decade.