Managing risk concentration is not only

important in risk management. This is equally

important when you are looking at
strategically positioning the business to future
products, market and sector that will add
value to the bank.
Half of the Australian banking industry loan
portfolio is exposed to properties. This is a
sector that is sensitive to unemployment rate
and interest rate. Seventeen per cent is
exposed to housing investment that is
sensitive to changes in asset price. Owner
occupied property is a buy on hold and in the
event of an asset price bubble as long as
unemployment rate remain low, loan defaults
is less likely to occur.
Loans that generate tangible economic growth
to Australia are only 21% of the banking
industrys loan portfolio. Tangible growth is
meant in the context of job creation,
production of consumable goods and services,
and development of infrastructure. It is a
portfolio structure that does not encourage
growth in deposit from other sectors that can
potentially generate new deposits from
domestic and foreign trade. It is worth
checking the Australian house hold income too
if it is tightly tied to property and high living
cost with no income left for savings. Should the
property price need to go down further and
should it be regulated going forward? Global
markets risk management products only
accounted to less than 10% of the banking
industrys total exposure. The graph on the
middle left side show a decrease in deposits
not just for the big four banks but across the
banking industry. Deposits to the big four bank
is shrinking not because of the new entrant
and increased competition in the banking
industry but because of lack of support to
Financial Institution (ADIs) Credit Review: Risk
concentration in the Australian Banking Industry
By Ferlyn Genato 06 May 2012
corporation and economic activities that
generates additional revenue and new cash
injection to the Australian economy.
Although the government of Australia made
a massive effort to support the other sector
through its fiscal policy (e.g. automobile,
agricultural, and shipping industry), new
initiatives from the banking sector is
required in order to generate new deposits
by way of diversifying its exposure. It takes
two to tango. The banking industry business
model in the last five years is tuned to
regional and global diversification however
new deposits remained as a challenge.
Addressing exposure diversification to asset
types and domestic clients is perhaps a
solution that could have been taken first
before jumping into regional or global
diversification or at least simultaneously
considered. This observation is also the
same to banking industry in other region.
In dollar term the big 4 banks still have the
large share of the deposit. Westpac Bank
and ING Bank Australia Limited are better
placed to grant new loans because of a
better loan to deposit ratio compared to its
peers.
The graph on the middle left side is the rate
of change in loan to deposit.
Funding requirement is expected to be a
challenge this year for both ANZ Bank and
National Bank, while Westpac Bank and
Commonwealth Bank may not need short
term borrowings this year. The statistical
data however can potentially change after
the impact of Basel III is incorporated to the
equity of the banks, and after the margin
requirement from the Dodd Frank rule is
also incorporated. The 4 big banks operate
in the US and are counterparties to US legal
entities.
Data source: APRA and Bloomberg
Disclosure: This article is intended for industry discussion and it is not intended for advice.