Growing Commodity Stress Is Fueling Risk for Australia's Banks

  • Prolonged commodity price weakness could test economy: Moody's
  • Risks from Australian housing market `skewed to the downside'

Stresses within the mining industry and rising housing market risks are clouding the outlook for Australia’s banks, according to Moody’s Investors Service.

While the resources industry represents less than 3 percent of banks’ overall lending, prolonged commodity-price weakness could test the resilience of the Australian economy, Sydney-based Moody’s analysts Ilya Serov and Patrick Winsbury said in a report Monday. They also underscored the risks from the nation’s housing market which are “skewed to the downside.”

With Chinese growth slowing and resources supply outstripping demand, Australia’s economy has been hurt by a slump in the price of key commodity exports such as iron ore and coal. The nation is also contending with a drop in mining capital spending, while a housing boom fueled by record-low central bank interest rates appears to have stagnated.

Second-Order Risks

“The unwinding of the commodities cycle is heightening second-order macroeconomic risks,” the Moody’s analysts wrote. “Ultimately, it could translate into a more broad-based economic slowdown and softer labor markets than currently anticipated.”

Economists are currently predicting gross domestic product growth of about 2.6 percent for 2016 and an unemployment rate around 6 percent, according to Bloomberg surveys.

Moody’s noted that the regions and industries most exposed to mining are “starting to see some signs of stress” and that it expected banks’ credit costs to increase, albeit moderately.

With global financial market turmoil fueling investor risk aversion, wholesale funding costs have already climbed and the price of insuring the bonds of Australia’s four biggest banks rose to an average of 98 basis points on Jan. 29 from 69 a year earlier.

In the residential property market, Moody’s reckons the adjustment in prices will be gradual, although it says the likelihood of an outright correction is rising.

While highlighting some of the concerns about Aussie lenders, Moody’s also noted that “these risks are somewhat mitigated by the current low interest rates and the relatively healthy state of Australian corporate balance sheets.” Moves by the regulator and banks to maintain prudent mortgage underwriting standards were an “important positive,” it said.

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