SECTORAL ANALYSIS

NON-FINANCIAL CORPORATIONS

During March quarter 2018, private non-financial corporations invested $39.7b in fixed assets, funded through gross saving of $19.9b and net borrowing of $18.5b. This change in financial position was a result of incurring $40.3b of liabilities, primarily through loan borrowings of $19.9b and equity issuance of $18.3b. Private non-financial corporations acquired $9.4b in financial assets, with an $8.6b increase in deposit assets, $2.4b increase in bond holdings and $1.9b increase in equity assets. This was partially offset by a decrease in loan assets of $2.9b.

The private non-financial corporations debt to equity ratio adjusted for price changes increased to 0.69 in March quarter 2018. This is the first increase in the ratio since March quarter 2016.

The increase in debt to equity ratio is illustrated in Graph 2, which shows that non-financial corporations sourced more funds through debt than equity this quarter, highlighting a change in funding strategy compared to the previous 7 quarters. On a non-adjusted basis, the debt to equity ratio rose more than the ratio adjusted for price change in March quarter 2018 due to valuation decreases of shares and other equity.

FINANCIAL CORPORATIONS

		Outstanding at end	Transactions during	Other changes during	Outstanding at end
		Dec Qtr 2017	Mar Qtr 2018	Mar Qtr 2018	Mar Qtr 2018
		$b	$b	$b	$b
Assets of financial corporations
	Central bank	190.5	-5.2	4.1	189.4
	Banks	3 564.0	40.0	35.4	3 639.4
	Other depository corporations	231.0	10.8	0.3	242.1
	Pension funds	2 183.4	28.8	-37.7	2 174.5
	Life insurance corporations	287.1	0.3	-5.2	282.2
	Non-life insurance corporations	217.1	1.4	-2.0	216.6
	Money market investment funds	36.6	1.1	-	37.7
	Non-money market investment funds	884.5	4.9	-20.0	869.4
	Central borrowing authorities	359.0	-2.4	0.7	357.3
	Securitisers	455.8	-1.8	-	454.0
	Other financial corporations	144.6	1.1	-3.4	142.3
Liabilities of financial corporations
	Central bank	189.4	-4.4	2.2	187.1
	Banks	3 750.2	26.2	10.9	3 787.3
	Other depository corporations	226.5	11.3	-2.8	235.0
	Pension funds	2 346.2	31.8	-38.7	2 339.2
	Life insurance corporations	292.5	0.7	-7.3	285.9
	Non-life insurance corporations	233.6	2.8	-2.5	233.9
	Money market investment funds	36.6	0.5	0.5	37.7
	Non-money market investment funds	969.0	10.1	-17.2	961.8
	Central borrowing authorities	392.5	1.7	-0.8	393.4
	Securitisers	455.3	-3.1	1.0	453.1
	Other financial corporations	109.2	-0.3	-0.8	108.1
- nil or rounded to zero (including null cells)

Financial corporations increased their asset holdings by $51.2b, driven by acquisition of loan assets and increased holdings of both short term and long term debt securities. This was partially offset by a valuation decrease of shares and other equity.

Financial corporations incurred $21.8b of liabilities, driven by insurance technical reserves and issuance of long term debt securities. This was partially offset by settlement of derivative liability contracts.

Banks’ funding through deposits decreased to 59.1%, which is the largest decline in deposit funding since March quarter 2015. Financing of their financial assets through equity also decreased this quarter to its lowest proportion in 7 quarters.

Long term debt securities as a source of funding increased this quarter to 14.2%. Banks issued $34.7b of bonds with a record $18.4b issued domestically this quarter.

Pension funds, life insurance corporations and non-money market financial investment funds

Graph 5 illustrates the long-term trend in the financial asset composition of pension funds. Pension funds' investment into shares and other equity saw a slight fall over March quarter 2018. Nonetheless, their investment into shares and other equity continues to make up the majority of their investment at 70.5% of total financial assets.



Pension funds holdings of shares and other equity decreased 1.0% during March quarter 2018. This was driven by valuation decreases of shares and other equity. A significant proportion of pension funds holding of equity is their holding of non-money market financial investment funds. As of March quarter 2018, 39.2% of shares and other equity held by pension funds were issued by non-money market financial investment funds. Non-money market financial investment funds hold larger investments in debt securities than pension funds (Graph 6) and thereby pension funds have an indirect exposure to debt securities.

Life insurance corporations held $225.9b in shares and other equity. Life insurance corporations predominately hold shares and other equities in non-money market financial investment funds and other private non-financial corporations.

The financial claims of households on the net equity in reserves of pension funds and of life insurance corporations were $2,295.6b and $110.7b respectively as of March 2018 while shareholders of life insurance corporations had claims of $32.9b. Of the total $2,339.2b assets of pension funds, 47.4% was invested through investment managers, 46.8% was directly invested in financial markets, and 5.8% was invested directly in life insurance corporations.



GENERAL GOVERNMENT

General government acquired $13.7b worth of financial assets during March quarter 2018, with the national general government accounting for the majority of this. Both the national general government and state and local general government funded their gross fixed capital formation mainly through gross saving. Gross saving for the national general government was $6.5b and for the state and local general government, $8.6b.

National General Government

The net change in financial position for national general government was $0.5b in March quarter 2018. This was made up of national general government acquiring $10.5b of financial assets, driven by loans and the purchase of shares and other equities. National general government incurred $9.9b of liabilities, driven by their issuance of long term debt securities.

National general government had total financial assets of $463.4b and total liabilities of $890.3b at the end of the March quarter 2018.


State and Local General Government

The net change in financial position of state and local general government was $1.1b during March quarter 2018. State and local general government acquired $3.2b of financial assets, driven by loans and the purchase of shares and other equities. State and local general government also incurred a net $2.1b of liabilities, this incurrence of liabilities was driven by loans.

State and local general government had total financial assets of $563.3b and total liabilities of $334.9b at the end of March quarter 2018.

Graph 8 illustrates the quarterly net issuance of debt securities for the operations of the national and state and local general governments. During March quarter 2018, the Commonwealth government issued $4.6b of bonds. For state and local general government, the central borrowing authorities are responsible for the issuance of debt. The central borrowing authorities repaid $0.6b of long-term debt securities and issued $1.3b of short-term debt securities this quarter.

Central Borrowing Authorities

Central borrowing authorities disposed $2.4b of financial assets, driven by deposits. Central borrowing authorities incurred $1.7b of liabilities, this was driven by short term loans and one name paper issuances. At the end of March quarter 2018, central borrowing authorities had total financial assets of $357.3b and total liabilities of $393.4b.


REST OF WORLD

Australia’s net international investment position at the end of March quarter 2018 was a net foreign liability of $954.6b (net financial asset position of the rest of world). This is a decrease of $34.1b from the previous quarter with net transactions of $7.4b (net change in financial position) and valuation decreases of $41.4b.

Non-residents' investment in Australia recorded transactions of $32.0b and valuation increases of $20.3b, which resulted in a increase of their holdings of Australian assets to $3,382.9b during March quarter 2018. The positive transactions were driven by bonds, shares and other equities, and one name paper, offset by settlement of derivatives. The valuation increases were predominantly driven by derivative contracts and holdings of debt securities.

Graph 9 illustrates that the non-resident ownership of national general government bonds as a share of total issuance has decreased this quarter from 55.4% to 54.5%.

Non-residents increased their liabilities to Australia, with net transactions of $24.6b and valuation increases of $61.8b during the March quarter 2018. Rest of the world now have $2,428.3b of liabilities with Australian residents. The positive transactions were driven by rest of world loan borrowing and issuance of one name paper. These were partially offset by settlement of derivatives contracts. The valuation increases were driven by unlisted equities and the derivatives market.