Fitch foresees credit squeeze coming

Fitch Ratings has added its voice to the growing consensus that Australia is heading into a credit squeeze. The ratings agency believes local banks may have to start rationing loans before the year is out.

Fitch associate director for financial institutions Tim Roche said on Monday that conditions in offshore wholesale debt markets were not improving and were not likely to improve until late this year or early in 2009.

Roche said the local banks were in good shape, with diversified earnings bases, high return on equity and "exceptional" asset quality. But their reliance on international debt markets was a cause for concern.

The banks have been able to maintain fairly normal debt issuance programs, at higher cost, but Roche said that if liquidity in those markets gets any tighter even the big Australian banks might have to "reduce their provision of credit".

Roche said the banks could raise equity capital to fund asset growth but current market volatility made that uncertain.

His comments echo those of several senior finance executives in the past week. On Monday Challenger Financial Services Group chief executive Mike Tilley said the group was operating its white label mortgage business in the expectation that it would have to rely on existing warehouse facilities and would not be able to do a securitisation issue this year.

Tilley said Challenger was already cutting back on the provision of high LVR and low doc loans, something that a number of non-conforming lenders did late last year.

He said a number of lenders were probably writing unprofitable business, given their lending rates and funding costs. He said that situation would not go on indefinitely.

Last week ANZ chief executive Mike Smith said growth in risk weighted assets had been well above expectations and had absorbed much of the flexibility provided by the underwriting of the bank's dividend reinvestment for last year's final dividend.

Smith said ANZ was doing very strong lending business, particularly among institutional clients. Growth in institutional assets (loans to corporate customers) was up 24 per cent for the financial year to date.

Corporate customers are doing more business with their banks because their access to corporate bond, commercial paper and private placement markets has been cut off.

This raises the prospect of the banks facing greater demand for funds than they can meet, given their own access to capital and debt funding

National Australia Bank managing director John Stewart told The Australian newspaper in an interview published on Monday: "At the moment, we're at a point where you can get credit but you have to pay a bit more for it. We could get to a point where there's a shortage even if you pay more; we're not there yet, but it concerns me."

Stewart said equity capital-raising for his and other banks, even for profitable lending, was not an option. The trouble would be that investors and markets would make the assumption that "you've got a hole in your balance sheet".

JP Morgan senior banking analyst Brian Johnson said in an interview last week: "Banks only have so much capital. ANZ raised $1.4 billion through a dividend reinvestment loan last November and that money is already gone."

Roche said that if banks do start rationing credit they would cut back on their exposure to certain industries in their business and corporate divisions. "On the consumer side the banks will pull back the discounts on variable rate home loans, they will do less low doc lending and maximum loan to valuation ratios will come back from 95 per cent to 90 or less."