Banks' impaired assets likely understated, says Australia's watchdog

Australia's banking regulator said on Wednesday impaired assets at banks were likely underestimated given lingering uncertainty about a recovery out of the economy's historic novel coronavirus slump.

Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres told a conference that while banks continued to be very well capitalised, their loan books were likely slightly overvalued.

"As we sit here today, impaired assets are probably a bit understated," Byres told Citi's Investment Conference in Sydney.

"There's still a lot of uncertainty around whether we'll have further outbreaks and economic restrictions; borders, if and when they'll open; when we'll get a vaccine."

The regulator has given capital leeway for banks to keep lending during the crisis, allowing them to offer loan holidays for several months to borrowers impacted by the crisis without requiring more capital.

Asset sales and dividend halts have also helped the four major banks that dominate Australia's financial system improve capital levels and remain above the minimum regulatory ratio of 10.5 per cent, even after taking huge provisions for possible defaulted debts.

"The fact that ratios have drifted up a bit ... is I think a good thing ... but you wouldn't want to be complacent."

APRA's guidance is for Australian banks, which have about one in every ten dollars lent frozen under a coronavirus forbearance programme, to not to pay more than 50 per cent of statutory earnings in dividends this year.