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During September quarter 2014, private non-financial corporations invested $52.5b in gross fixed capital formation, funded through gross saving of $32.1b and net borrowing of $22.1b (change in net financial position). Their net borrowing was a result of incurring $31.7b in financial liabilities, mainly in the form of equity issuance and bank loans, and acquiring $9.6b of financial assets, mainly through accounts receivable, equity and bank deposits. Public non-financial corporations invested $4.5b in gross fixed capital formation during the quarter, funded through gross saving of $2.0b and net lending of $6.9b. The net lending was a result of the privatisation of a state and local public non-financial corporation.
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]. It 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 substantial return on equity compared with an unleveraged 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 0.70 in September quarter 1994. It declined to a low of 0.55 in June 2007, and increased to a peak of 1.01 during December 2008 (the global financial crisis). It has since declined to be 0.77 at the end of September quarter 2014. During the global financial crisis, there was a rise globally in the cost of debt securities, and this was also the case for Australian corporate debt.
The adjusted ratio reflects the removal of price change from the original series and therefore provides an indicator for leverage without the market price changes. This may provide a clearer picture of what corporations are actively doing with regard to their balance sheet. For example, the decline in the adjusted ratio after December 2008, 2.13 to 1.27 by December 2011, indicates that private non-financial corporations were paying off the debt and were relying much more on their own funds (equities) to finance their activities. As at September 2014 the adjusted ratio was 1.30 The ratio has been stable around this level for the last three years.
FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS
During September quarter 2014, financial corporations acquired $33.4b in financial assets, mainly through loans ($25.1b), where over a third of these were issued by banks; and bonds ($8.8b), most of which were acquired by banks. The $31.3b of liabilities incurred were mostly in the form of deposits ($20.4b), $28.4b of which were accepted by banks, and insurance technical reserves $14.9b, most of which were superannuation reserves.
Graph 2. Banks liabilities as a proportion of their assets
Banks funding of their total financial assets through deposits declined 0.6 percentage points from June quarter 2014 to 57.6% for the latest quarter. It was around these levels 20 years ago, recording 58.7% for September quarter 1994. Since September quarter 1994 it declined, and quite significantly through the 2000s to reach 43.3% just prior the global financial crisis in March quarter 2008. As at September quarter 2014, funding through equity was at 16.5%, higher than both long and short term securities, which were 14.3% and 9.6% respectively.
Financial asset portfolio of pension funds, life insurance corporations and non-money market investment funds at end of quarter
Graph 3. Assets of pension funds, life insurance corporations and non-money market investment funds
Source(s): Table 18. Financial Assets and Liabilities of Pension Funds ($ 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)
The graph above illustrates the financial asset mix at the end of September quarter 2014 of pension funds, life insurance corporations and non-money market investment funds. Overall, these three institutions invest predominately in equity assets. At the end of September quarter 2014, pension funds held $957.8b in shares and other equity (57.0% of their financial assets), of which $654.9b were issued domestically and $302.9b were issued by the rest of world. At the end of September quarter 2014, life insurance corporations held $231.5b in shares and other equity (82.8% of their financial assets), of which $191.4b was invested in non–money market financial investment funds. These non–money market financial investment funds held $209.7b in shares and other equity and $86.1b in debt securities, 63.4% and 26.0% respectively of their financial assets.
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 September quarter 2014 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $1,757.3b and $56.2b respectively, while shareholders of life insurance corporations had claims of $21.3b. Of the total $1,789.3b assets of pension funds, 45.3% was directly invested in financial markets, 43.6% was invested through investment managers and 11.1% was invested directly in life insurance corporations.
During September quarter 2014 general government invested in $11.5b in gross fixed capital formation, funded through net borrowing of $16.4b (change in net financial position). National general government gross fixed capital formation was $3.7b and state and local general government gross fixed capital formation was $7.8b during September quarter 2014, driven by New South Wales, Victoria and Queensland.
Graph 4. Change in net financial position, general government
During September quarter 2014, the net change in financial position (net borrowing) for national general government was -$15.5b. During the quarter, transactions in total liabilities for national general government were $21.4b. The main contributors to these transactions were treasury bonds issuance, $18.6b and treasury notes issuance, $2.3b. During the quarter, transactions in total financial assets were $6.0b. The main contributor was other accounts receivable of $5.1b. At the end of September quarter 2014, national general government had total financial assets outstanding of $459.7b and total liabilities outstanding of $709.4b.
During September quarter 2014, the net change in financial position (net borrowing) of state and local general government was -$0.9b. During the quarter, transactions in total financial assets were $4.0b and total liabilities were $4.9b. The main contributors to these transactions in total liabilities were $2.2b of transactions in long term loans and placements and $1.3b of transactions in unfunded superannuation claims. At the end of September quarter 2014, state and local general government had total financial assets outstanding of $444.1b and total liabilities outstanding of $314.8b.
Graph 5. Net issue of debt securities, national general government and central borrowing authorities
The graph above illustrates the quarterly net issuance of debt securities for the operations of the national and state and local general governments. For state and local general government, the central borrowing authorities are responsible for the issuance of their debt.
For the national general government, from September quarter 1994 until December 2008, quarterly net issuance was generally under $5.0b. In that period there were also many quarters of net maturities of debt. From March quarter 2009 onwards the national general government has had significant net issuance of debt, with the highest net issuance for the period being recorded in June quarter 2009, during the global financial crisis (GFC). Since the GFC, there have been two quarters, June quarters 2012 and 2013, when national general government securities recorded net maturities, $0.5b and $9.0b respectively, driven by maturities in treasury notes. A similar long term pattern to the national general government is displayed for issuance of central borrowing authority debt.
REST OF WORLD
Australia’s net international investment position at the end of September quarter 2014 was a net foreign liability of $875.3b (net financial position of the rest of world), up $9.4b from the previous quarter with net transactions of $14.6b.
Non-residents had net transactions of $21.9b in Australian financial assets during September quarter 2014 with a valuation increase of $65.7b which resulted in $2,702.1b worth of Australian financial assets held by non-residents. The main contributors to these transactions were $22.5b of equities, $20.2b of bonds and $6.5b worth of loans and placements. These were partially offset by deposit asset transactions of -$12.2b and net redemption of $12.0b of one name paper.
Australian residents had net transactions of $7.3b in the rest of world liabilities during September quarter 2014. The main contributors to these transactions were other accounts payable of $8.6b, unlisted shares and equity of $5.9b and bonds issued in Australia of $5.0b. These were offset by transactions in short term loans and placements of -$4.9 and bonds issued offshore of -$3.9. The total value of the rest of world assets held by Australian residents increased by $78.2b to $1,826.8b at the end of the quarter. This movement was driven by a $7.3b increase in transactions and $70.9b worth of valuation increases.
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