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Australian regulators to "closely monitor" financial system risks - RBA's Bullock

SYDNEY, Oct 27 (Reuters) - Australian banks were on a solid footing, though risks were rising and regulators will keep a close eye on them over the coming months, a senior central bank official said on Tuesday.

The Reserve Bank of Australia (RBA) sees threats emanating from both overseas and at home in the balance sheet of businesses and households, driven by the coronavirus pandemic induced recession, assistant governor Michelle Bullock said.

Australia’s A$2 trillion ($1.4 trillion) economy is facing its worst downturn in a generation, putting further pressure on bank’s profits and capital, Bullock said in a speech titled “Financial Stability in Uncertain Times.”

Australia’s four major banks - Commonwealth Bank, Westpac Banking Corp, National Australia Bank and ANZ Banking Group - are highly profitable and well capitalised.

However, they are likely to see an increase in non-performing loans, Bullock said, as business failures are set to rise and as household balance sheets come under pressure amid a tapering off of government support.

“The Australian banks are starting from a good position – a lot of capital and strong profits,” Bullock said.

“But ... the economic effects of containing the health crisis are going to put pressure on their profits and their balance sheets. The main way this will happen is through credit losses – both through business and household loans.”

One area of particular concern, Bullock said, was commercial real estate with uncertainty over prospects for rental demand for CBD office property, particularly in Sydney and Melbourne.

In both cities, there is substantial new supply coming onto the market, and vacancy rates have already started to rise. Property prices could tumble in the current environment, putting pressure on investors.

Bullock pointed out that banks did not have a large direct exposure to commercial property though impairment rates were set to pick up. ($1 = 1.4027 Australian dollars) (Reporting by Swati Pandey; editing by Jane Wardell)

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