Moody’s sees negative industry outlook for Australia/NZ banks

Singapore, June 23, 2009 -- Moody's Investors Service says that its 
industry outlook for banking systems in Australia and New Zealand is 
negative, reflecting the impact of the slowdowns in global and domestic 
economies, but both systems also remain robust.

"The slowdowns are clearly making themselves felt on the performances of 
banks in Australia and New Zealand, but the systems in both countries
remain very sound," says Jerry Chien, MD for Moody's Financial 
Institutions Group in Asia Pacific. By contrast, ratings outlooks vary, 
between stable and negative.

Chien was speaking on the release of Moody's latest annual Asian Banking 
System Outlook, which covers 16 jurisdictions. The report is authored by 
senior analysts with the Moody's Financial Institutions team.

The Australian financial system remains one of the world's most robust, 
having largely escaped crisis-related losses, but credit costs are 
mounting and loan volumes are contracting as economic weakness persists, 
the report says.

While funding costs have risen as a result of the crisis and competition
for deposits is high, pre-provision bank margins are improving as the 
banks are better able to price for risk

In the case of Australia, losses from the banks' retail exposures, which 
typically comprise over half of total loans, are not likely to create the 
same degree of stress as in other developed markets; rather it is 
business / corporate sector performance that will likely remain the swing 
factor for Australian bank asset quality.

While Australian banks' corporate exposures are skewed towards stronger
companies -- many of whom have recently raised capital -- single-name
concentration risk is relatively high, creating some sensitivity to 
event risk.

In New Zealand, the banking system, as indicated, remains sound, despite 
the challenges it faces. 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 country has a weakening local economy that is 
relatively small and narrow and makes it vulnerable to external shocks.

The property market has suffered a decline over the past year, with house 
prices falling 9% in 2008, and as mortgage insurance is not common in New 
Zealand, this leaves the banks exposed to property market reversals. That 
said, the loan-to-value ratios of the rated banks indicate there is some 
buffer for a fall in property prices before any loan loss materializes.

On the other hand, New Zealand corporate asset quality remains strong as 
companies have de-geared in recent years. However, material stress is 
appearing in the country's large dairy sector as a result of lower milk 
prices and high leverage present in some recent farm conversions and 
corporatisations. 

For Asia's banks as a whole, when looking at their prospects, the Moody's 
report sees challenges in light of the severe and protracted nature of 
the current global recession.

Indeed, the widespread presence of negative industry outlooks across the 
banking systems covered by Moody's in the region reflects our basically 
cautious stance over the next 12 months.

Moreover, while mildly positive macro-economic indicators and signs of a 
stock market rebound have recently emerged, the unprecedented nature of 
the financial crisis raises questions over the certainty of a swift 
recovery.

Another significant uncertainty is whether the recent surge in wealth
across Asia can generate sufficient levels of consumption to compensate
for the lower demand from the US and other developed economies,
traditionally the significant buyers of Asia's goods.

But it is also important to note the significant steps taken since the
Asian financial crisis and the fact that standards for accounting,
transparency, governance, risk management and regulation have all 
improved markedly throughout the region.