Cautious optimism for top four banks

The country’s top four banks, ANZ, Commonwealth, NAB and Westpac, are emerging from the global financial crisis in relatively good shape but challenges remain ahead, according to findings from Fitch Ratings.

In its semi-annual review and outlook for the Australian banking sector, the agency pointed to asset quality as a key challenge for banks going forward.

“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,” said the director at Fitch’s financial institutions group, Tim Roche.

The agency also noted that while elevated, gross impaired loans remained low in relation to offshore peers, sitting at around 1 per cent of gross loans. In addition, pre-eminent operating profit continued to rise, which combined with loan-loss reserves, offered a substantial capacity to absorb further impairments before impacting capital.

In the report, Fitch also highlighted the importance of the government guarantee on wholesale funding, which was introduced in the fourth quarter of 2008. It stated that Australia’s high current account deficit is largely funded by the nation’s banking system, as reflected in the major banks’ high reliance on offshore wholesale markets.

However, it suggested the portion of short-term wholesale funding in the overall mix had diminished during the global crisis and that this might be a precursor to more conservative funding mixes and maturity profiles, particularly in light of regulatory capital and liquidity requirements currently under proposal.

Looking ahead, the report stated that uncertainty and volatility would continue to influence the major banks’ operating environment. It noted a level of concentration risk in the banks’ exposures to the Australian economy, which in turn is benefiting from growth in Asia, particularly China. While this has contributed to a relatively stable bank performance throughout the global financial crisis to date, it constituted a concentration risk all the same.