s&p warns banks

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    PRESS RELEASE: S&P: Australian Ppty Mkt Worrisome For Bks

    *DJ S&P: Australia Residential Ppty Mkt Worrisome For Banks


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    PRESS RELEASE: S&P: Australian Ppty Mkt Worrisome For Bks


    Following is a press release from Standard & Poor's:


    Subject: S&P: Aust. Residential Property, Worrisome for Banks


    MELBOURNE (Standard & Poor's) May 15, 2003--"Following a sharp escalation in property prices and increasing household indebtedness over recent years, the Australian residential property market conditions present the classic preconditions for potential financial stress in the Australian financial institutions sector," said Gavin Gunning, credit analyst, Financial Services Ratings, in a global report published by Standard & Poor's Ratings Services.

    "An unexpected sharp increase in interest rates in Australia would undoubtedly cause stress among highly leveraged borrowers," said Mr. Gunning. "But Standard & Poor's expects Australian banks to manage a moderate correction in the housing market without undue pain."

    At present, the Australian mortgage-banking sector has a healthy credit profile, and bank losses from residential mortgage lending have been negligible in recent years. Looking further back, the Australian housing market has not gone through periods of correction like that of the U.S., the U.K., and some Asian markets.

    "Nonetheless, some segments of the Australian property sector are already experiencing stress, most particularly the inner-city residential investment market. Standard & Poor's is assessing the impact of such stress on the financial strength of banks, and is monitoring for signs of stress affecting other segments".

    The Standard & Poor's commentary article "Global House Prices Keep Rising, But Low Rates Limit Risks", analyzes the impact of residential property market sensitivities on a number of banking systems globally, including the U.S., the U.K., Australia, Hong Kong, Spain, and the Netherlands.

    The commentary article was published on May 14, 2003 and can be found on RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. The commentary can also be found on Standard & Poor's Web site at www.standardandpoors.com.au. Click Fixed Income and find the article under "Commentary and News."

    Contact: Gavin Gunning, Melbourne (61) 3-9631-2092
    Copyright (c) 2003, Standard & Poor's Ratings Services




    Australia
    In Australia, low interest rates and robust economic expansion have led to strong investment in property assets and a sharp escalation of property prices. Concurrent with the escalation in property prices, the level of household indebtedness has increased considerably. Also of concern are warnings in 2002 by the Australian Prudential Regulation Authority regarding a relaxation of property-lending practices, and a potential underinvestment in risk management during a period of cost cutting in the financial sector. Residential property market conditions in Australia present the classic preconditions for potential financial stress in the financial institutions sector, with the inner-city residential investment market already under pressure.

    An unexpected sharp increase in interest rates would undoubtedly cause stress among highly leveraged borrowers. But Standard & Poor's expects Australian banks to manage a moderate correction in the housing market without undue pain. At present the mortgage-banking sector has a healthy credit profile. Bank losses from residential-mortgage lending have been negligible in recent years. Looking further back, the Australian housing market has not gone through periods of correction like that of the U.S., the U.K., and certain Asian markets. Several factors create strong incentives for Australian borrowers to make timely repayment on their obligations:

    The lack of tax deductibility of interest on mortgage debt encourages the use of surplus funds to repay debt.
    Australian banks have full recourse to borrowers' other assets over and above the mortgaged property. In some other banking systems borrowers are able to walk away from a property with limited recourse.
    The average Australian loan is relatively short-term, typically varying between four and seven years.
    Australian culture has historically emphasized the concept of home ownership, reflected in Australia's high rate of home ownership. Historical loss experience on owner-occupier dwellings, compared to residential investment properties, has consistently been lower.




 
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