Wednesday, 20 August 2008

Impaired Assets of Aussie Banks Start to Climb

I first posted this graph back in February. Since then, impaired assets have increased sharply. The more important line in the graph is the "impaired assets as a percentage of total assets." It has also turned up sharply but is still very low by historical standards.

If we consider that the impaired assets ratio peaked at 0.69% in 2002 and that it was fairly mild as far as credit cycles go, we can probably expect that ratio to climb well above that level this time around given the explosion in credit in the intervening period and the great unwind now underway.

It should be noted as well that the graph above only includes data until the end of March 2008, before any of the announcements by NAB and ANZ. Also the Australian economy really only started to show clear signs of slowing after March.

As the economy slows further and unemployment rises into 2009 putting further pressure on households, impaired assets will rise in the household as well as the corporate sector. Whilst the RBA may decide to cut interest rates aggressively in such an environment, there is much doubt surrounding the ability of banks to pass those cuts on to customers as they contend with higher funding costs.