This article is from the Australian Property Journal archive
THE worst of the financial storm is over but a rise in bad commercial property loans has caught the Reserve Bank’s attention.
The RBA’s Financial Stability Review said Australia’s financial system remained resilient through the crisis period and the banks experienced only a relatively shallow downturn in underlying profits.
However, the RBA noted there has been a more significant deterioration in the quality of banks’ business loan portfolios, particularly for commercial property.
The RBA noted that banks’ commercial property exposures have continued to deteriorate further over the past six months.
It said much of the recent rise in impairments has been accounted for by loans to highly geared property developers, many of which were on the books of the smaller Australian-owned banks.
“These borrowers are often among the first to experience difficulties when financial and/or economic conditions turn for the worse,”
And as a consequence of the bad loans, the RBA said banks are screening commercial property borrowers more closely, requiring additional collateral.
The central body noted the banks have also shifted their focus exclusively toward higher-quality projects.
The RBA banks have lifted the cost of funding and this has being passed onto customers.
Over the past months, the RBA noted the quantity of loans demanded by property developers has declined, as some projects have become unviable.
The RBA found funding conditions for Australian banking institutions have continued to improve with spreads in wholesale markets narrowing although they remain higher than pre-crisis levels.
“Banks have experienced improved access to offshore funding markets, and the general narrowing of risk spreads has increased the relative attractiveness of issuing in the unguaranteed market. As a result, the banks had substantially reduced their use of the wholesale funding guarantee by early 2010,”
However the RBA said the bank’s nonperforming loans ration has risen to 3% as at December 2009 — 35 basis points higher than six months earlier.
“The increase in this ratio over recent years was initially driven by a small number of exposures to highly geared companies with complicated financial structures and/or exposures to the commercial property sector.
“This remains an area to watch closely in the period ahead,”
“Nonetheless, recent indications are that banks’ overall loan losses may have peaked and that profits have again begun to increase. While the regional and foreign-owned banks experienced a somewhat larger deterioration in performance during the downturn than did the majors, the more recent improvement has been broadly based across all categories of banks,” the RBA concluded.
Australian Property Journal
