Moody's on banks

Moody's Investor Service released its annual Asian Banking System Outlook last week, and observed that the industry outlook for the Australian and New Zealand banking systems remains negative. Nevertheless, the Australian financial system remains one of the world's most robust and the New Zealand banking system is sound.

In Australia credit costs are mounting and loan volumes are contracting as economic weakness persists but bank margins are improving as the banks are better able to price for risk. Losses from retail exposures are not likely to create the same degree of stress as in other developed markets and corporate exposures are skewed towards stronger companies but single-name concentration risk is relatively high, creating some sensitivity to event risk.

In New Zealand, customer deposits have grown faster than loans so far in 2009, in stark contrast to previous years. And regulatory developments continue to support financial system stability, but the weakening local economy, that is relatively small and narrow, makes it vulnerable to external shocks.

The property market has suffered a decline over the past year and this leaves the banks exposed to property market reversals. On the other hand, corporate asset quality remains strong as companies have de-geared in recent years although material stress is appearing in the dairy sector.