KONTAK PERKASA FUTURES – Debt investors are taking rising bad loans at Australia’s major banks in their stride, with the cost to insure their bonds falling to an almost four-month low.

Credit default swaps for the country’s four biggest lenders fell to 97 basis points on average on Thursday, a level unseen since Jan. 25, according to data compiled by Bloomberg. The premium over similar U.S. bank instruments also shrank to just 20 basis points from as much as 50 in February.

While the banks have boosted provisions for souring loans, a large part of that is related to a few major resource-related borrowers. Moody’s Investors Service said this month that even with asset-quality pressures, the lenders’ balance sheets are solid and their domestic retail units are “exceptionally” profitable while record-low interest rates support mortgages. Decisions not to increase dividend payouts to equity holders may also provide some comfort to credit investors.

“The latest bank results have been absorbed in a constructive manner by the credit market,” said Justin Davey, a Sydney-based money manager at BT Investment Management, which oversees about $11 billion in fixed income. “A lot of the provisions we’ve seen are idiosyncratic. If you look at the numbers for housing, they’ve moved up a little bit, but they’re not material, and that’s really the bigger risk asset as opposed to large institutional loans.”

Adapting to Change

Although Australia’s economy faces growth challenges as it navigates away from a reliance on mining, continued jobs growth has taken the unemployment rate to a 2 1/2-year low. The central bank is also seeking to support demand and, spurred by signs of disinflationary pressures, opted to cut its cash rate to an unprecedented 1.75 percent this month.

Australia’s banks are also responding to an uncertain global environment by focusing on their more profitable domestic businesses and dialing back risk, especially after the prudential overseer prompted lenders to strengthen underwriting standards. The tightening of risk appetite is likely to continue, Fitch Ratings said in a report this month, in which it affirmed the credit ratings of Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp.

All four have this month taken advantage of the improved investor sentiment and tapped international bond markets. The recent spurt of issuance by Australian banks follows the release of profit figures and was led by Westpac’s five-part $4 billion offering. NAB’s issuance has included a 1.75 billion euro ($2 billion) transaction, while ANZ did a $1.5 billion deal and CBA placed a $1 billion offering.

Risk Rally

The drop in Australian banks’ CDS costs has also been spurred by a global rally in riskier assets that’s seen stocks, commodities and credit instruments climb. The Aussie banks have been among the strongest performers this quarter in the 25 member iTraxx Australia CDS index, having fallen an average of 20 basis points since March 31.

“We’re connected to the international markets and they’ve generally been performing,” said BT’s Davey. “Credit markets have tightened over the last number of months and banks have gone along for that ride.”

Source : bloomberg.com