Thursday, September 20, 2012

Australian Banks Pass IMF Stress Test

Pretty stringent tests assuming 5% decline in GDP and 35% fall in house prices. Australian Banks Pass IMF Stress Test
Australia's lenders came through the global financial crisis in relatively good shape helped by conservative lending policies, strong prudential oversight, and a firm underlying economy supported by a resources boom. The country's biggest banks also managed to steer clear of the kind of exotic structured-credit products that dragged down U.S. lenders.
The resources boom is just 4.5% of GDP and 1.5% of employment. As opposed to the housing market which is over 3x annual GDP in asset value. And construction which is 9% of the workforce. Both industries are bubble driven, but the first is driven by someone else's bubble.
While profit growth has slowed in the past year--as credit demand stays subdued and higher international funding costs squeeze margins--the big four remain among the world's most profitable lenders, and are routinely praised by ratings firms for their strong balance sheets and low mortgage-arrears rates.
The biggest risk isn't to the banks, it's to sustainability of prices. 30-40% of mortgage debt is being funded from overseas. If that dries up then prices have to adjust to match. It's the next buyer that determines the price, not the previous one under rosier conditions. Not to mention the pressure on the currency from having to service that foreign debt.
The IMF also considers that Australia's central bank has plenty of room to cut interest rates if the need arises to shield the country from a sharp downturn in the global economy.
Speaking of pressure on the currency . . .

1 comment:

jesse said...

Might be interesting for you: