By Jacob Greber
Sept. 25 (Bloomberg) -- Australia's financial system is weathering the global credit turmoil better than many others around the world as local banks cut lending and focus on their funding, the central bank said.
``Notwithstanding this positive position, the Australian financial system has felt the impact'' of global difficulties, the Reserve Bank of Australia said in its half-yearly Financial Stability Review published today in Sydney. ``The general increase in uncertainty has also meant that most banks are taking a more cautious attitude to lending.''
Australian financial companies including Macquarie Group Ltd., Babcock & Brown Ltd. and National Australia Bank Ltd. are among the Asia-Pacific region's biggest losers from a global credit squeeze that has forced the U.S. to propose a $700 billion Wall Street rescue package. While ``strong and profitable,'' the nation's five largest banks have almost tripled provisions for bad debts to A$3.1 billion ($2.6 billion), the report said.
``The past year has been a very challenging one for the many financial systems,'' today's report said. ``A return to more settled conditions will require a rebuilding of confidence in many overseas financial institutions and further steps to strengthen their balance sheets.''
Australia's dollar traded at 83.63 U.S. cents at 11:32 a.m. in Sydney from 83.62 before the central bank's statement was released. The two-year government bond yield was little changed at 5.51 percent.
`Grave Threats'
Today's report, which was finalized yesterday, comes after Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending.
The Fed arranged yesterday to channel $10 billion through Australia's Reserve Bank to relieve shortages of U.S. dollars in the local market as Bernanke broadens efforts to revive confidence amid concern Washington's plan to rescue the banking system faces delays in Congress.
Uncertainty about whether the U.S. can resolve the credit logjam has buffeted Australian banking stocks and driven up the cost of short-term funding.
The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate was 85 basis points at 8:43 a.m. in Sydney today. The gap was 29 basis points at the start of the month.
Bank Shares
Before the stock exchange opened today, Commonwealth Bank of Australia, the nation's largest mortgage provider, had fallen 25 percent this year, Westpac Banking Corp. had shed 12 percent, National Australia tumbled 32 percent and Australia & New Zealand Banking Group Ltd. was down 32 percent.
Macquarie, Australia's biggest investment bank, was down 48 percent on the year and infrastructure developer Babcock had tumbled 94 percent, the worst performing stock on the MSCI Asia- Pacific Index.
Australia's five largest lenders increased provisions for bad and doubtful debts to A$3.1 billion in the first half of 2008, compared with A$1.2 billion in year-earlier period, today's report shows.
The increase is due ``to the general deterioration in the credit environment, both in Australia and overseas,'' as well increased risk from ``highly leveraged companies that have experienced difficulties in the current environment,'' the central bank report said.
Melbourne-based ANZ Bank has tripled provisions for bad debts this year after lending to troubled financial companies including Allco Finance Group and Centro Properties Group.
National Australia
National Australia may seek to offload its A$1 billion in U.S. subprime mortgage-related investments as part of the U.S. government's $700 billion Wall Street rescue package, the Australian newspaper reported today, citing a report by Goldman Sachs Group.
The higher charges mean bank profits will fall ``in the near term,'' the central bank report said, citing analysts' forecasts that aggregate earnings at the biggest banks will be around 10 percent lower in the second half of 2008 than the same period last year.
Should that happen, the 2008 post-tax return on equity, a measure of how well companies invest shareholders' money, would be around 16 percent, the Reserve Bank said.
While lower than the average return over the past decade, this would ``be much higher than that being earned in many other banking systems around the world and many other industries in Australia.''
Profits after tax at Australia's biggest banks rose 12 percent to around A$10 billion for the latest half year, the central bank said.
``The banking system is soundly capitalized, it has only limited exposure to sub-prime-related assets, and it continues to record strong profitability and has low levels of problem loans,'' today's report said.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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