Not only are Australian banks weathering the international financial storm better than their peers in many offshore markets, but their basic financial strength hasn’t been hit so far.
That’s a message many investors have ignored, given their lemming like approach to the valuation of banks since late January.
In fact, the market reaction of investors would indicate they see big problems in all banks as share prices have plunged.
And while the banks are very well capitalised, according to the RBA’s Financial Stability Report, none have been downgraded by rating agencies and the nuts and bolts of their financial structure are sound.
They have plenty of liquidity, with individuals and corporates depositing tens of billions of dollars with them since the credit crunch hit last August.
That is an interesting judgment by individuals and companies that is at variance with the stockmarket performance.
That’s also of interest given the quiet disclosure in the report that the country’s financial regulators have proposed a modest deposit insurance system to the Federal Government.
The catalyst was the bailout and nationalisation by the Northern Rock Bank in Britain, a situation and eventuality that the regulators and Government there were not equipped to tackle.
"This experience is consistent with the Council’s previous analysis that arrangements in Australia would be enhanced by the establishment of a scheme to repay depositors in a failed authorised deposit-taking institution (ADI) in a timely fashion.
"Under the existing legislation, depositors rank ahead of other creditors in a failed ADI, although they are likely to have to wait some time before they could be repaid.
"Given this, the Council is working on an Early Access Facility, which would provide early repayment of up to $20 000 per depositor in a failed institution; it is estimated that this cap is sufficient to cover the entire deposits of around 80 per cent of depositors.
"Such a facility was recommended to the previous Government, and is before the current Government, while Council members have continued to investigate a number of technical issues relating to making early repayments to depositors in a closed institution,” The RBA said
Given the RBA’s view that the banks are well capitalised and are ‘weathering’ the storm well, a deposit scheme idea might send the message that all is not well. But it would seem the argument is for a form of insurance and preparedness in the event things get worse in the future.
But the position of the banks is impressive, as detailed by the RBA.
Here are some highlights.
The ratio of banks’ non-performing assets to total assets remains low both by historical and international standards.
As at end December 2007, this ratio stood at 0.4% of banks’ total assets, down slightly on the figure six months earlier.
Of these non-performing assets, just under half are classified as ‘impaired’, in that repayments are in arrears by more than 90 days (or are otherwise doubtful) and the debt is not well covered by the value of collateral.
The remainder while in arrears is considered to be well covered by collateral.
Despite the recent small decline in non-performing assets as a share of total assets, charges for bad and doubtful debts increased by one third over the past year, albeit from a very low base, to be the equivalent of 0.2% of outstanding loans.
The recent decline in the aggregate non-performing loan ratio is evident across each of the main segments of banks’ domestic loan portfolios.
In the business portfolio, the ratio of non-performing loans to total loans stood at 0.9% as at December 2007, compared with 1.3% four years earlier.
Within this aggregate figure, the share of banks’ commercial property lending that is classified as impaired picked up slightly over the year to September 2007 (the latest available data), to 0.3%, although this too remains low by previous standards.
As noted above, some banks have recently announced higher provisions against business exposures, though the increase remains small compared with the size of the aggregate business loan portfolio.
That said, any slowing in the domestic economy would likely be associated with some decline in the average quality of the business loan portfolio.
In the housing portfolio, 0.3% of loans on banks’ domestic balance sheets were non-performing as at December 2007, down from the figure in mid year and about the same as a year ago.
Most non-performing housing loans are considered by banks to be well covered by the value of collateral.
The ratio of non-performing personal loans to outstanding has also fallen slightly over the past six months and, at 0.9%, is around the same level as a year ago.
As at end December 2007, the ratio of the value of non-performing housing loans to total housing loans on banks’ domestic books stood at 0.32%, unchanged from a year earlier.
Of these non-performing loans, most were well covered by collateral.
The 90-day arrears rate for housing loans that have been securitised was also broadly unchanged over 2007, and stood at 0.40% in December. The arrears rate on securitised loans has, on average, been a little higher than that for loans on banks’ balance sheets, partly reflecting the higher share of low-doc loans in the securitisat
