The Falling AUD Will Boost Bank Earnings: Moody's

The falling AUD is benefiting Australian banks by boosting offshore revenues and reducing funding and recessionary risks, Moody’s reports.

Moody’s Investors Service VP Ilya Serov said the AUD’s 13% fall since May was credit positive, and would boost earnings of ANZ and Macquarie Bank in particular.

Here’s why:

– A weaker AUD will boost export-oriented sectors as the economy transitions out of the mining boom. This reduces the threat of banks’ asset quality deteriorating.

– Offshore revenue is worth more in AUD terms. For Macquarie Bank, which makes 63% of its revenue overseas (excluding New Zealand), a 10% fall in the AUD gives it a 6% boost in full-year earnings.

– Banks typically hedge their foreign currency issuance, so an AUD drop frees up some of this collateral. Serov notes that this improves short-term liquidity but isn’t a long-term benefit because collateral flows may reverse as the AUD stabilises or rises.

Such inflows are worth $450-$500 million for each one-cent movement in the AUD/USD exchange rate for ANZ and NAB, and higher for CBA and Westpac, Moody’s estimates.

– Australian banks source a lot of their funds from overseas. A falling AUD means that banks need less foreign currency to fund their Aussie-denominated assets.

“Given Australian banks’ traditionally high exposure to confidence-sensitive offshore funding markets, any reduction in this exposure is credit positive,” Serov writes.

The AUD is currently worth $US0.8903 after briefly hitting a three-year low late this morning.

It is expected to fall further should the RBA decide to cut the cash rate by 25bp to 2.5% tomorrow – a move that has become all but certain.

Now read: Pretty Much Everyone Is Betting That The RBA Will Cut Rates This Month

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