Australian Banks Risk More Bad-Debt Losses in 2010, Fitch Says

Jan. 14 (Bloomberg) -- Australian banks, including Westpac Banking Corp. and Commonwealth Bank of Australia, risk more loan defaults as the government unwinds economic stimulus and the central bank raises interest rates, according to Fitch Ratings.

Small and medium-sized companies with loans are starting to show “signs of stress,” and mortgage and credit-card defaults may rise as borrowing costs climb, Fitch said in a report today. The biggest banks, which also includes National Australia Bank Ltd. and Australia & New Zealand Banking Group, have “substantial capacity” to absorb bad debts, Fitch said.

Australia’s government has said A$42 billion ($39 billion) of stimulus spending has already peaked, and the central bank has started raising interest rates toward pre-crisis levels after an economic recovery. These steps may stretch smaller businesses and households in 2010, adding to bad-debt charges at banks, Fitch said in its six-monthly review of the lenders.

“As interest rates rise towards a more neutral setting and government stimulus measures are progressively wound back, asset quality may be further tested,” Tim Roche, director at Fitch’s financial institutions group, said in a statement. “Impairment charges are likely to remain high.”

Still, the threat of a series of “large corporate collapses” has receded in the past 12 months and the Australian economy is now stronger than expected at the start of 2009, Fitch said. Tests by the lenders suggest any increase in mortgage defaults would be “manageable,” it said.

Westpac, Australia’s second-biggest bank, and ANZ Bank, the fourth largest, said last year that bad debts have probably peaked. NAB, the third-largest bank, said then it was too early to say. Commonwealth Bank, the No. 1 bank, said in November the pace of the recovery was “unclear.”

Australia’s central bank increased interest rates three times since October to 3.75 percent from 3 percent.

The four largest banks are also likely to adopt “more conservative funding mixes” with longer maturities if regulators impose higher and more liquid capital requirements, Fitch said.