Banks’ asset quality has peaked: Moody’s

Maadhavi Ramanayake, associate analyst at Moody’s, said the banks’ healthy asset quality metrics reflect low interest rates and conservative corporate balance sheets, but noted that there was a moderate deterioration in selected metrics between April and September 2015, “reflecting a more challenging environment”.

“However, the banks are already well-capitalised to absorb any losses, and are also in a phase of capital accumulation,” she said.

Meanwhile, the bank’s domestic operations continued to narrow their funding gaps during the period, “although at a slower pace”, according to Moody’s associate analyst Tanya Tang.

“Deposit growth was sustained at a slightly higher rate than loan growth for the period,” she added.

Looking ahead, Moody’s expects capital accumulation to continue for some time, noting that the federal government agreed in October with a key recommendation by the Financial System Inquiry that the banks’ capital ratios should be set at an “unquestionably strong” level by the end of 2015-16.

Furthermore, Moody’s said the banking systems’ funding gap has been partially filled by superannuation funds continuing to provide net deposit flows, resulting in a reduction in the banks’ relative reliance on wholesale debt funding since the GFC.

The banks have also reduced their reliance on short-term funding in recent years, but Moody’s said the overseas portion has recently rebounded back to a near decade-high level.

“We expect this development may now have peaked and that banks may further lengthen their weighted-average wholesale funding maturities as they work towards meeting the forthcoming Net Stable Funding Ratio (NFSR) requirement,” Ms Tang said.

Moody’s said the banks’ deposit quality has also improved following the implementation of the Liquidity Coverage Ratio (LCR) regime, which has incentivised banks to focus on stable deposits.

“In particular, the banks have moved away from less reliable, non-transactional corporate deposits,” the group said.

Housing net credit growth picked up very slightly between April and September, reflecting an increase in growth of owner-occupier loans that was offset by a slowing of growth in investor loans, according to Moody’s.

Meanwhile, the credit ratings firm said corporate sector lending grew faster, suggesting that business lending conditions eased as a result of low interest rates and increased competition among lenders.

“However, businesses remain cautious, as evidenced by the subdued growth in new corporate lending commitments,” Ms Tang noted.

[Related: Risk of mortgage default increasing, says Moody’s]