The Reserve Bank has given the Australian financial system, including the much talked about home loan sector, a big tick in its latest Financial Stability Report.
The banks, other lending groups, insurers, fund managers and the stockmarket, all get good marks in the report.
There’s a tiny upward move in problem loans in housing and loan arrears and bank repossessions, but it’s tiny compared to what was seen in 2006-2008.
Commercial property remains a concern for banks and trusts, but the bank says that’s showing signs of improving now that much of the losses have been taken (see accompanying story).
The euro crisis continues to burble along, with recent eruptions around Ireland that could either be settled, or re-ignited by the latest bailout plan for the broken Anglo Irish Bank that was due overnight.
The bank says Australia’s economy and financial system are relatively strong, while the health of the major international banks has improved despite lingering areas of uncertainty.
"In the period since the previous Financial Stability Review the health of the major international banks has mostly improved, despite a significant amount of uncertainty in financial markets," the RBA said in the review, released today.
The uncertainty has focused on concerns about sovereign debt in the euro area and the potential for negative feedbacks through credit and funding markets, the RBA said.
Despite support packages and the stress-testing of euro area banks, "some country specific concerns within the euro area have recently re-emerged".
"These events have influenced markets outside Europe and there have been periods of renewed weakness in international funding markets," the RBA said.
In contrast, the RBA said financial conditions were "quite buoyant" in faster-growing Asian and Latin American economies.
For Australia, the RBA was upbeat.
The financial system remains in relatively strong condition, as does the broader economy," the central bank said.
The effects of the global crisis and ensuing recession on Australia were "quite mild" and economic growth "has now broadly returned to trend" it said.
The RBA said indicators of the strength of the Australian banking system had improved further recently.
"The flow of bad debt charges has generally peaked, while the stock of non-performing assets on banks’ balance sheets appears to be stabilising at a level that remains low in comparison with previous cyclical experience," the RBA said.
And, while there had been "some upward drift" in the rate of arrears on housing loans, it remained "fairly low overall" (see separate housing story).
The central banks said loan impairments and losses were mainly concentrated in the business loan portfolio, in particular for commercial property loans.
The major banks remain highly rated by international credit rating agencies.
Using Standard & Poor’s ratings, the major banks are AA-rated, while the other Australian banks are ranked between upper medium and lower-medium investment grade, the bank said.
Recently, Standard & Poor’s revised up the outlook from ‘negative’ to ‘positive’ for HSBC Bank Australia. Standard & Poor’s outlook for Australian banks is largely stable, based on expectations of sound macroeconomic conditions, strong earnings and conservative lending standards.
The bank said households were not having trouble servicing their debts.
"Despite being more indebted, households’ debt-servicing ability is currently strong, supported by ongoing income growth," the RBA said.
The RBA said housing price rises had stayed broadly in line with growth in incomes since a significant rise in the price to income ratio between the late 1980s and early 2000s.
"Since then, during a time of strong population growth in Australia, price rises nationally and in capital cities have on average been broadly in line with growth in incomes."
Rental yields (the ratio of rental income to dwelling prices) had been steady in most of Australia for the past decade.
"Nonetheless, many markets have experienced very strong capital growth in recent years, particularly in Melbourne, and the recent slowing in price appreciation is a welcome development for the resilience in household finances," the RBA said in the review.
Demand by other owner-occupiers has also slowed since the start of the year, in response to declining affordability stemming from increased dwelling prices and interest rates, while investor activity has been fairly steady.
Overall, the annualised pace of housing debt growth was 7 per cent over the six months to July 2010, down from 9 per cent in the six months prior, and well below the average annual increase of 14 per cent in the ten years to July 2009.
Signs of financial stress in the household sector remain fairly limited, with the improvement in the labour market further underpinning households’ debt-servicing capacity despite higher interest rates. Loan arrears rates have drifted up since the end of 2009, but remain fairly low relative to a number of other countries.
The rate of non-performing housing loans on banks’ balance sheets was 0.7 per cent at the end of June, marginally higher than the start of the year; the bulk of these loans remain well secured.
The arrears rate for securitised loans &nda
