Moody's Includes Aussie Banks in List of Asian Lenders Most Vulnerable to EU Debt Crisis

Rating agency Moody's named on Tuesday banks in Australia and three other Asia Pacific nations as the most vulnerable in the region to Europe's debt crisis. The three others are lenders in New Zealand, Korea and Vietnam.

Stephen Long, managing director of Moody's Financial Institutions Group, explained that the banks of the four countries are heavily dependent on foreign funding. This situation places the banks at incurring higher costs if the wholesale market experiences stress.

In the case of Vietnam, its weak financial system and dependence on cheap dollar loans were additionally cited by Mr Long for placing the country's banks at risk of tightening foreign currency liquidity.

External funds account for 19 per cent of Australian banks' funding and 16 per cent of New Zealand banks. South Korean lenders depend on the external markets for 9 per cent of its funding, but the banks' foreign currency-to-deposit ratio is 328 per cent.

"Our base case is that the resilience of banks in Asia Pacific will generally persist. However, the risks to that scenario have increased, warranting a closer examination of how banks could be affected under more adverse scenarios," Mr Long said.

Besides Australian banks, Moody's said that the country's property market is one of five sectors with increasingly menacing risks that must be monitored closely in 2012. But the rating agency pointed out that mortgage insurance and low loan-to-value ratios give Australian lenders some protection against declining house prices. In the event of a property market depression, a subsequent dip in foreign investor confidence would hit the Australian banks' heavy reliance on offshore funding.

Another risk facing Australian banks is a downturn in commodity prices which could expose the lenders to an adverse price shock scenario despite an increase in sales volume which would not offset fall in prices.

Moody's added that the risk of a real estate bubble burst in Asia is a concern due to sharp rises in Hong Kong, China, Taiwan and Singapore's property market.

The rating agency likewise identified a hard landing for the Chinese economy as a potential problem, but indicated the impact would only be moderate after Moody's stress test indicated that Chinese banks' current profitability, loss reserves and capital positions would still provide a strong cushion for the Asian giant.