What would happen to bank profits in the event of a series of shocks
that induce a recession, or worse? At the request of the International
Monetary Fund and local financial regulators, Australian banks have
been modelling a scenario devised by the IMF.
In a slideshow lodged by ANZ Bank with the ASX yesterday for a talk by
the bank’s chief risk officer, Peter Hodgson shed some light on stress
testing by banks of the IMF scenario.
The recession scenario provided by the IMF included six features:
unemployment in Australia at 9%; short term interest rates
at 7.8%; the US$/A$ exchange rate at 45 cents; a 30% fall in domestic
property prices; growth in business credit of 0.8% and a 100 basis
point increase in the credit spread.
Hodgson said ANZ modelled the scenario over three years to 2008 and assumed the stresses scenario passed by the end of 2008.
There’s not much good news in the stress testing for the merchants of gloom.
Under the IMF scenario, ANZ estimated its net profit would have been
5-10% lower in the first year; around 40% lower in the second year, and around 30% lower in the
third year. Note that ANZ would still have made a profit in each year.
Hodgson said that 37% of the fall in net profit under the
scenario would be due to reduced profits of companies, leading to
institutional lending losses. He said losses on credit cards and
unsecured loans would have accounted for 26% of the reduced
He said the mortgage book would have accounted for only 15% of
the reduced profit, while business banking would have accounted for
only 8% of the reduced profit.
The results for other banks under the IMF stress testing are not
public, though they are said to be of a similar order to those
disclosed by ANZ.