Moody's sanguine on Australian banks

Moody's Investors Service yesterday provided an alternative assessment on the credit quality of Australian banks, and reiterated its view that "the outlook for Australia's banking system remains stable."

The ratings agency confirmed the credit ratings of all banks, including the Aa2 ratings for each of ANZ, Commonwealth, NAB and Westpac.

In the opinion of Moody's "banks have built sizeable capital buffers to absorb asset quality weakness and they have a good measure of flexibility to deal with challenging conditions in international wholesale funding markets."

Moody's said that "the strength of the domestic economy", with low unemployment and favourable economic growth in 2012, was a "dynamic [that] will support earnings and asset quality, although we anticipate pockets of deterioration in some business lines."

It noted the "structural sensitivity" of banks given their high proportion of wholesale funding, and also noted the fast growth in deposits and pre-funding of term debt that allowed banks  "to sit out periods of volatility in international funding markets."

Even so, Moody's wrote of the "potential for protracted international funding market dislocations arising out of Eurozone contagion present[ing] a clear downside risk to our central scenario, that would likely require the banks to ration credit and/or tap central bank repo facilities until economic stabilisers can take effect."

On credit quality, Moody's said that it expect impairments to remain at a benign level, albeit above the very low levels of the mid-2000s.

In the short term Moody's said it expects a further rise in provisions, and a reversal from the write-backs that were a feature of banks' financial reports over the last year.