Stress test reveals bank strength
(24 January 2010 – Australia) Global ratings agency Fitch has completed an assessment of Australia’s major banks and has found they could manage a severe housing market downturn.
Despite Australia’s housing prices "looking high" compared to the United States and Europe, the global credit agency said it did not expect a market downturn, given strong prospects for growth.
However, Fitch did note that the housing market did have some vulnerabilities, including a household debt to disposable income ratio that had expanded to 159 percent by mid-last year.
The debt to disposable income ratio has also reached higher levels that those hit in the US, Spain and Britain in the peak of their housing cycles.
The global ratings agency said that if the housing market deteriorated, the banking system was in a position of "substantial capacity" to manage it.
Fitch analysed market scenarios under which they suffered mild, moderate and severe defaults of 20, 30 and 40 percent respectively.
The severe and moderate scenarios mirrored defaults experienced in the UK and Ireland during the GFC.
Fitch’s assessment has found that under the most severe of conditions assessed losses would total more than A$6 billion across the big four, with net losses reaching 10 percent of their combined operating profits.
'Even in a severe downturn, gross losses incurred by the four major banks in their mortgage portfolios would be manageable,' noted John Miles, a senior director at Fitch.
'Of more concern would the broader state of the economy, should such a downturn ever occur, and the impact this would have on commercial loans,' Mr Miles said.
However, Fitch did note that the housing market did have some vulnerabilities, including a household debt to disposable income ratio that had expanded to 159 percent by mid-last year.
The debt to disposable income ratio has also reached higher levels that those hit in the US, Spain and Britain in the peak of their housing cycles.
The global ratings agency said that if the housing market deteriorated, the banking system was in a position of "substantial capacity" to manage it.
Fitch analysed market scenarios under which they suffered mild, moderate and severe defaults of 20, 30 and 40 percent respectively.
The severe and moderate scenarios mirrored defaults experienced in the UK and Ireland during the GFC.
Fitch’s assessment has found that under the most severe of conditions assessed losses would total more than A$6 billion across the big four, with net losses reaching 10 percent of their combined operating profits.
'Even in a severe downturn, gross losses incurred by the four major banks in their mortgage portfolios would be manageable,' noted John Miles, a senior director at Fitch.
'Of more concern would the broader state of the economy, should such a downturn ever occur, and the impact this would have on commercial loans,' Mr Miles said.
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