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During December quarter 2016, private non-financial corporations invested $46.8b, funded through gross saving of $44.7b and net borrowing of $2.6b (change in net financial position). This net borrowing figure was as a result of incurring financial liabilities of $70.0b, mainly due to equity issuance. Private non-financial corporations acquired $11.2b in financial assets, which was driven by an increase in deposits that was partially offset by a decrease in other accounts receivable.
Graph 1 Private non-financial corporations, Debt to equity ratio
The debt to equity ratio provides an assessment of a corporation's financial leverage calculated as [(total liabilities less equity) / equity]. The ratio indicates in what proportion the corporation is using equity and debt to finance its activities. During periods of buoyant income and stable interest rates, a leveraged corporation stands to make a substantial return on equity compared with an un-leveraged corporation. However, during more uncertain times a leveraged corporation is at risk from fluctuations in earnings and / or rising interest rates, such that debt servicing costs may not be met. The ratios presented here are averages for all private non-financial corporations.
The private non-financial corporations debt to equity ratio was 0.7 in December quarter 2016, a slight decrease from the September quarter 2016.
In contrast, the adjusted debt to equity ratio was 1.1 in December quarter 2016, recording a slight fall from the September quarter 2016 ratio of 1.2. This ratio has been trending downwards for the last 13 quarters, indicating that private non-financial corporations have a declining ‘real’ level of debt to equity.
FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS
During December quarter 2016 financial corporations acquired $75.9b in financial assets. Loans to households and private non-financial corporations, along with the acquisition of bonds and equity drove the acquisition in assets. These gains were partially offset by decreases in derivatives and loans to public non-financial corporations. To fund their asset acquisition, financial corporations incurred liabilities driven by increased deposits, which were partially offset by derivatives and maturities of long term debt securities.
Graph 2. Banks liabilities as a proportion of their assets
In December quarter 2016, deposits, debt securities and equity comprised 98.5% of total bank funding, increasing from September quarter 2016 (97.1%). Banks’ funding of their total assets through deposits increased to 59.6%. The proportion of bank debt securities as a source of funding decreased slightly during the quarter due to a decline in debt issuance and increased funding through deposits.
Financial asset portfolio of pension funds, life insurance corporations and non-money market investment funds at end of quarter
Graph 3. Assets of Pension funds, Life insurance corporations and Non-money market investment funds
Source(s): Table 18. Financial Assets and Liabilities of Pension Funds ($ million); Table 19. Financial Assets and Liabilities of Life Insurance Corporations ($ million) ; Table 22. Financial Assets and Liabilities of Non-money market investment funds ($ million)
Graph 3 illustrates the financial asset mix at the end of December quarter 2016 of pension funds, life insurance corporations and non-money market investment funds. Overall, these three institutional sectors invest predominately in equity assets.
During December quarter 2016, pension funds increased shares and other equity holdings by 3.7%, driven by transactions and revaluations. At the end of December quarter 2016, pension funds held $1,267.4b in shares and other equity (63% of their financial assets), of which $867.3b were issued by domestic sectors and $400.1b were issued by the rest of world.
At the end of December quarter 2016, life insurance corporations held $170.4b in shares and other equity (76% of their financial assets), an increase of 2.9%. Life insurance corporations predominately held shares and other equities in non-money market financial investment funds and other private non-financial corporations.
Financial claims between the household sector, pension funds, life insurance corporations, rest of world and investment managers at end of quarter
At the end of December quarter 2016 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $2,056.8b and $58.5b respectively, while shareholders of life insurance corporations had claims of $23.8b. Of the total $2,084.3b assets of pension funds, 50% was invested through investment managers, 44% was directly invested in financial markets and 6% was invested directly in life insurance corporations.
During December quarter 2016, general government invested $14.6b, with state and local general government accounting for majority of this investment. State and local general government and national general government recorded gross saving of $6.6b and $3.9b respectively during the quarter. State and local general government and national general government were net borrowers in December quarter 2016.
Graph 4. Change in net financial position, General government
National General Government
During December quarter 2016, the net change in financial position (net borrowing) for national general government was -$4.7b. This was driven by the national general government incurring $17.9b in financial liabilities while acquiring a net $13.2b in financial assets. The net incurrence of liabilities was predominately driven by $23.8b in net issuances of Commonwealth government bonds.
At the end of the December quarter 2016, national general government had total financial assets of $542.1b and total liabilities of $936.0b.
State and Local General Government
During December quarter 2016, the net change in financial position (net borrowing) of state and local general government was -$13.9b. State and local general government repaid $11.0b in financial liabilities and disposed of $24.9b financial assets.
The net disposal of financial assets was due to the sale of equities ($23.9b).
At the end of December quarter 2016, state and local general government had total financial assets of $500.6b and liabilities of $341.6b.
Graph 5. Net issue of debt securities, National general government and Central Borrowing Authorities
Graph 5 illustrates the quarterly net issuance of debt securities for the operations of the national and state and local general governments. During December quarter 2016, the Commonwealth government issued $23.8b of bonds. For state and local general government, the central borrowing authorities are responsible for the issuance of their debt.
Central borrowing authorities, net transactions in liabilities of -$4.1b were driven by short-term loan repayments and bond maturities. At the end of December quarter, central borrowing authorities had total assets of $363.0b and total liabilities of $375.5b.
REST OF WORLD
Australia’s net international investment position at the end of September quarter 2016 was a net foreign liability of $1,021.6b (net financial asset position of the rest of world), a decrease of $19.8b from the previous quarter with net transactions of $3.4b (net change in financial position) offset by valuation decreases of $23.2b.
Non-residents’ investments in Australian financial assets recorded valuation increases of $38.3b, along with net transactions of $17.2b, which resulted in an increase of their holdings of Australian financial assets to $3,248.0b during December quarter 2016. The transactions were driven by equities, short term debt issuance and long term debt issuance, which were partially offset by derivatives. The valuation increases were driven by derivatives and equities, which were partially offset by bonds issued.
During December quarter 2016, non-residents increased their financial liabilities to Australia, with net transactions of $13.9b and valuation increases of $61.4b, resulting in $2,226.4b of rest of world assets held by Australian residents. The transactions were driven by loans and placements, and acceptance of deposits, which were partially offset by derivatives. The valuation increases were driven by increases in unlisted shares and other equities, and derivatives, which were partially offset by valuation decreases in long term debt.
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