Australia’s Banks Better Placed Than Most, RBA Says

March 26 (Bloomberg) -- Australian banks continue to report solid profits, haven’t accumulated large holdings of high-risk securities, and didn’t ease lending standards to the same extent as counterparts around the world, the central bank said.

“The Australian banking system is considerably better placed to weather the current challenges than many other systems around the world,” the Reserve Bank of Australia said in its half-yearly Financial Stability Review published today in Sydney. The nation’s five largest banks, led by Westpac Banking Corp., reported an annualized post-tax return on equity in the latest half year of 15 percent, the report said. Still, the slowing economy has led to an increase in charges for bad and doubtful debts to A$5.3 billion ($3.7 billion) from A$1.4 billion a year earlier.

“Compared with other financial systems around the world, Australia looks to be a shining light,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. The Reserve Bank “has no real concern about a vulnerable or fragile banking system.”

Australia’s dollar traded at 69.96 U.S. cents at 11:43 a.m. in Sydney from 69.95 cents before the central bank’s report was released. The S&P/ASX 200 stock index gained 0.7 percent to 3,633, led by shares in exporters and banks.

“Notwithstanding this positive assessment, the banking system is facing a more difficult environment than it has for some years,” the report said.

Bad Loans

Problem loans have risen from “very low levels” and lending growth has also slowed recently, the Reserve Bank added.

The ratio of non-performing assets to total on-balance- sheets assets was about 1 percent in December, compared with 0.4 percent a year earlier, the central bank said. “This ratio is now marginally higher than that recorded in the 2001 downturn” and “well below” the 6 percent peak in the early 1990s, when the nation’s economy was last in a recession.

Housing loans that were 90 days or more in arrears accounted for 0.48 percent of outstanding loans in December, compared with 0.32 percent a year earlier.

“Looking ahead, the main downside risk to the performance of banks’ housing portfolios is from a rise in unemployment as the economy slows,” the report said.

Australia’s economy unexpectedly shrank 0.5 percent in the three months through December from the previous quarter, the first contraction in eight years, and the jobless rate rose in February to a four-year high of 5.2 percent as companies such as Macquarie Group Ltd. and BHP Billiton Ltd. cut full-time jobs.

Interest Rates

To boost the economy, central bank policy makers led by Governor Glenn Stevens have cut the benchmark lending rate by a record four percentage points since September to a 45-year low of 3.25 percent.

The cuts and government grants to first-time home buyers of as much as A$21,000 are unlikely to cause a U.S.-style subprime crisis, Anthony Richards, head of economic analysis at the Reserve Bank, said in Sydney today.

“The past year and a half has seen lending standards tighten in Australia, with a significant shrinkage in the amount of lo-doc and non-confirming lending,” Richards told a housing conference. Such loans are often compared with U.S. subprime loans.

Reductions in borrowing costs “have helped to alleviate debt-servicing pressures,” the central bank said in today’s report.

Government Guarantee

Many businesses have taken a “more conservative approach to their finances, by paying down debt and raising equity,” the report said. “This is despite the business sector, as a whole, having entered the current period of financial turmoil with its balance sheet in good shape after a number of years of solid profit growth.”

Following the collapse of Lehman Brothers Holdings Inc. in September, which deepened a global credit squeeze, Australia’s government in November provided a guarantee for wholesale funding for the nation’s banks.

“Since these arrangements have been in place, Australian banks have issued A$85 billion of long-term debt,” the report said. Of that, some A$81 billion was issued under the guarantee.

“This compares with just A$3.5 billion of term debt that was issued in the three months to November,” the report said.

The nation’s four largest banks raised a total of A$18 billion from shareholders in the second half of 2008.

Bank Ratings

Moody’s Investors Service this month lowered its outlook on Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia and Westpac Bank to negative from stable. That was the first time Australia’s four biggest banks have had a negative outlook since the 1991 recession.

All four banks remain Aa rated by the New York-based ratings agency. Moody’s revised the outlook for National Australia Bank Ltd. to negative in August.

Today’s report also noted the U.S. government’s plan, announced this week, to support so-called public-private investment funds to purchase troubled loans and securities, has “received widespread market support.”

“Despite this, it could be some time before it is clear whether these initiatives have been sufficient to put the financial sector on the path to recovery,” the report added.