Sydney, December 6th 2012 – Moody's Investors Service says that the outlook for the Australian banking system remains stable, reflecting a balance of positive and negative influences on bank credit profiles going into 2013, against the backdrop of a broadly supportive domestic economy.

"Continued robust GDP growth is expected to support employment overall, but the moderating character of the resources boom and strength of the Australian dollar will contribute to weakness in some sectors. Therefore, there may be moderate and patchy pressure on asset quality, but impairments will likely remain below the sector's long-term average," says Patrick Winsbury, a Moody's Senior Vice President.

"For the next year, 2013, we also expect bank earnings growth to slow as a result of low credit growth -- mostly due to general business and consumer caution, mainly related to the non-resources sector -- a lower interest rate environment, and ongoing funding cost pressures," says Winsbury.

"But overall profit metrics will remain consistent with current rating levels because of efficiency gains and the major banks' strong pricing power," says Winsbury, who was speaking on the release of Moody's latest "Banking System Outlook Australia", and which he authored.

The outlook expresses Moody's expectation of how bank creditworthiness will evolve over the next 12-18 months, which would be over the course of 2013 and into early 2014. However Moody's notes that with resources-sector investment forecast to peak between end-2013 and mid-2014, pressures in the operating environment could start to build in the longer-term.

With asset quality and capital, net credit costs are expected to rise moderately, yet remain below the long-term average. The two-speed economy and the moderation of the resources boom will likely raise impairment charges in sectors and regions showing slower growth, while broad-based deleveraging in the corporate sector and residential mortgage pre-payments have created buffers that should prevent a rapid deterioration in overall asset quality.

As a result of their strong profitability and low credit growth, the banks will continue to generate capital. Their capital levels already provide a solid buffer against stress, and position them well for the approach of Basel III.

On the issue of funding and liquidity, Australia's major banks remain sensitive to conditions in international wholesale funding markets, but are much more strongly positioned than in 2008 to accommodate market dislocations. They will continue to reduce the proportion of funding sourced internationally and fund new loan growth with domestic deposits.

Meanwhile, profitability metrics are likely to stay strong by international comparison, but profit growth is expected to stagnate in the current low credit growth environment. Factors likely to constrain profitability -- ongoing funding cost pressures, a small rise in credit costs and minor margin pressure from falling interest rates -- will be offset by the banks' strong pricing power on loans and cost efficiency programs.

With systemic support, Australian bank supervisors will maintain a stance that is broadly supportive for bank creditors. While the Australian Prudential Regulation Authority (APRA) is committed to strengthening the bank recovery framework, in line with Financial Stability Board proposals, it is cautious on bank resolution -- specifically creditor bail-ins. Moreover, as a result of the strong performance of Australia's banks during the crisis, creditor bail-ins are not high on the political agenda.

In summary, the stable outlook for the Australian banking system is consistent with the stable outlooks on the ratings of domestic banks and the stable outlook on the Aaa-rated Australian sovereign. The outlook also reflects the resilient performance of the Australian economy in Moody's central (expected) macro-economic scenario. At the same time, an above-average level of uncertainty surrounds our macro-economic forecasts.

Moody's maintains public ratings on of the country's 16 domestic banks, and 5 of the 47 foreign banks, including subsidiaries and branches, operating in Australia. At end-August 2012, the rated banks accounted for over 99% of loans made by domestic banks and 94% of total banking system loans. The average stand-alone financial strength of rated Australian banks is B-, which equates to a1 on the long-term scale. The average supported rating is Aa3.

Re-disseminated by The Asian Banker