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October, 2017 3:59 AM



RBA confirms strong financial system

RBA confirms strong financial system

The Reserve Bank has handed down the latest review of the financial system.

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13.10.2017 03:49 PM

Reserve Bank confirms strong financial system
Financial Stability Review; Chinese trade

Reserve Bank Financial Stability Review: The Reserve Bank has handed down the latest review of the financial system. “The financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

Key risks: “The key domestic risks in the Australian financial system continue to stem from household borrowing. Household indebtedness, most of which is mortgage borrowing, is high and gradually rising against a backdrop of low interest rates and weak income growth.”

Chinese trade: Exports increased 9.0 per cent over the year to September in yuan terms (forecast +10.9 per cent). Imports increased 19.5 per cent (forecast +16.5 per cent). The Chinese data is important for exporters, especially mining and energy companies. The Financial Stability Review has implications for finance providers, the broader sharemarket and interest rate settings.

What does it all mean?

While the financial system is regarded in strong shape, the Reserve Bank has provided a detailed assessment of the risks. Housing and household finances are the key areas of domestic concerns. But the Bank notes that the share of non-performing home loans continues to fall, wealth is rising and mortgage buffers stand at 2½ years of scheduled repayments at current interest rates.

There isn’t really anything new in the Financial Stability Review. There are a host of risks, but, if anything, the latest metrics suggests the risks haven’t intensified in the past six months.

What do the figures show?

Chinese trade:

Exports increased 9.0 per cent (forecast +10.9 per cent) in the year to September in yuan terms. Imports increased 19.5 per cent (forecast +16.5 per cent). The trade surplus was 193 billion yuan ($29.4 billion). Economists had forecast a trade surplus of 266.1 billion yuan). 

Reserve Bank Financial Stability Review

Overall, the RBA noted: “The financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

Global risks: “There are concerns that the combination of low interest rates and low volatility in financial markets is promoting excessive risk-taking via a search for yield. Indebtedness and asset prices have also risen further in some countries, from already high levels, increasing the risk of a disruptive correction.”

Key domestic risks: “The key domestic risks in the Australian financial system continue to stem from household borrowing. Household indebtedness, most of which is mortgage borrowing, is high and gradually rising against a backdrop of low interest rates and weak income growth.”

Households & housing: …”household balance sheets and the housing market remain a core area of interest. Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher.”

Residential building: “While there have been some reports of settlement delays, there is little evidence of settlements actually failing.”

On tighter lending standards: “With the tightening of lending standards, there is a potential that riskier lending migrates into the non-bank sector.”

On tighter lending standards: “The tightening of banks’ lending standards for property loans is constraining some households and developers but, in doing so, making the balance sheets of both borrowers and lenders more resilient.”

On the business sector & commercial property: “Business conditions are generally favourable, although there are some concerns about non-residential commercial property markets. In Sydney, price increases continue to outpace the growth of rents for these properties. In contrast, activity is more subdued in some other cities and vacancies are elevated, especially in Perth.”

On banks: “Bank profitability is high and banks are seeking to maintain this by reducing their lower yielding assets, both domestically and abroad.”

On the non-bank sector: “While the banking system has minimal exposure to the non-bank financial sector, growth in finance outside the regulated sector is an area to watch.”

Retail sector: “Liaison with industry suggests that strong competition in the retail sector, particularly from online and new entrants, is compressing retailers’ margins, constraining their ability to accommodate rent increases.”

On Brisbane apartment markets: “Conditions are relatively weak in the Brisbane apartment market, with a large increase in supply reflected in declines in prices and rents. There are, however, few signs of significant settlement difficulties to date.” “Some concerns remain about the process of absorbing the substantial increase in new apartments in Brisbane.”

What is the importance of the economic data?

China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economic have major implications for the Aussie economy.

The Financial Stability Review is published by the Reserve Bank every six months. The report is basically a health check on the financial sector but it also assesses the state of household and business balance sheets.

What are the implications for interest rates and investors?

The Reserve Bank continues to closely watch the housing market and the debt levels of households. But there are no implications for interest rates from the latest Financial Stability Review.

Next Monday Chinese inflation figures are released with the National People’s Congress starting on Wednesday while monthly activity data is out Thursday – economic growth, retail sales, production and investment.

Originally published by Craig James, Chief Economist, CommSec
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