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During September quarter 2015, private non-financial corporations invested $47.0b in gross fixed capital formation, funded through gross saving (Net saving plus consumption of fixed capital) of $22.6b and net borrowing of $35.8b (change in net financial position). Their net borrowing was a result of incurring $54.3b in liabilities, mainly in the form of equity issuance ($30.9b) and loans and placements ($23.9b), and the acquisition of $18.5b of financial assets, driven by shares and other equity increasing $6.7b during the quarter.
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 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 0.79 in September quarter 2015. The ratio is at its highest level since September 2012.
As at September 2015 the adjusted ratio was 1.22, a decrease of 0.02 over the quarter. 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. The decrease in the adjusted ratio indicates that private non-financial corporations relied less on debt in September quarter 2015 and more on their own funds to finance their activities.
FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS
During September quarter 2015 financial corporations acquired $78.0b in financial assets. Loans to the household sector ($25.1b), other private non-financial corporations ($19.3b) and the rest of the world ($15.1b) drove the increase in assets, along with bond holdings, increasing $15.6b during the quarter. To fund their asset acquisition financial corporations incurred $75.2b of liabilities, with $48.9b from deposits and $15.1b with insurance technical reserves (most of which were superannuation reserves).
Graph 2. Banks liabilities as a proportion of their assets
Banks funding of their total assets through deposits decreased to 55.5% during September quarter 2015, while the proportion of banks funding through long term debt securities increased slightly.
Despite the net increase in issuance of bank equity ($12.6b) their funding through equity declined to 15.3%, due to a decline in valuation of equity by $53.7b in the September quarter. Banks funding through equity is at its lowest point since September 2012.
Financial asset portfolio of pension funds, life insurance corporations and non-money market investment funds at end of quarter
Graph 3. Assets of Pension funds, Life insurance corporations and Non-money market investment funds
Source(s): Table 18. Financial Assets and Liabilities of Pension Funds ($ 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 2015 of pension funds, life insurance corporations and non-money market investment funds. Overall, these three institutions invest predominately in equity assets.
During September quarter 2015, pension funds decreased shares and other equity holdings by $61.4b or 5.7%, driven mainly by revaluations (-$80.8b). At the end of September quarter 2015, pension funds held $1,013.8b in shares and other equity (57.7% of their assets) of which $674.3b were issued domestically and $339.5b were issued by the rest of world.
At the end of September quarter 2015, life insurance corporations held $239.0b in shares and other equity (81.8% of their assets), a decrease of $4.9b or 2.0%. Life insurance corporations predominately held shares and other equities in non-money market financial investment funds $195.2 and other private non-financial corporations $21.8b.
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 2015 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $1,841.9b and $63.5b respectively, while shareholders of life insurance corporations had claims of $22.6b. Of the total $1,872.1b assets of pension funds, 45.2% was invested through investment managers, 44.1% was directly invested in financial markets and 10.7% was invested directly in life insurance corporations.
During the September quarter 2015, general government invested $10.2b in gross fixed capital formation with state and local general government accounting for majority of this investment at $6.9b. State and local general government investment in gross fixed capital formation was funded through $3.5b in net savings plus consumption of fixed capital and $0.7b in net borrowings.
Graph 4. Change in net financial position, General government
During September quarter 2015, the net change in financial position (net borrowing) for national general government was ($15.5b). During the quarter, national general government acquired a net $9.3b in financial assets while incurring $24.8b in liabilities. Net issuance of Commonwealth government bonds increased $24.0b and drove the increase in liabilities, while $6.5b in other accounts receivable and $2.4b in loans and placements were the drivers behind the acquisition of financial assets. At the end of the September quarter 2015, national general government had total financial assets of $488.0b and total liabilities of $801.3.
During September quarter 2015, the net change in financial position (net borrowing ) of state and local general government was ($0.7b). During the quarter transactions in total financial assets were $7.0b and total liabilities were $7.7b. Net acquisition of financial assets was driven by loans and placements borrowed by central borrowing authorities of $3.6b as well as deposits accepted by Banks ($1.5b). Net liabilities were driven by long term loans and placements of $5.8b. At the end of September quarter 2015, state and local general government had total financial assets of $462.1b and total liabilities of $330.8b.
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.
The national general government issued $24.0b of bonds in September quarter 2015 resulting a level of bonds on issue of $439.5. Net issuance of Commonwealth government bonds were taken up banks ($4.9b), Other depository corporations ($4.3b) and the Central bank ($2.9b). Rest of world also made significant acquisitions of general government issued bonds this quarter, totalling ($9.9b).
Central borrowing authorities recorded a net issuance of ($5.2b) in one name paper and ($1.9b) in bonds. In addition Central borrowing authorities raised $3.1b in long term loans and placements and $2.9b in short term loans and placements. At the end of September quarter, central borrowing authorities had total financial liabilities of $392.2b and total assets of $375.1b.
REST OF WORLD
Australia’s net international investment position at the end of September quarter 2015 was a net foreign liability of $922.8b (net financial asset position of the Rest of World), an increase of $18.1b from the previous quarter with net transactions of $18.9b and valuation decreases of -$0.8b.
Non-residents acquired $38.6b of Australian financial assets, incurred valuation increases of $88.8b, which resulted in an increase in their holdings of Australian financial assets to $3,110.7b during September quarter 2015. Transactions were driven by bonds ($16.3b), equities ($14.6b) and loans and placements ($12.3b) in September quarter 2015. The valuation increases were driven by derivatives ($55.1b), bonds ($38.8b) and loans and placements ($10.9b). These valuation increases were offset by a valuation decrease in equities (-$32.1b), which recorded its second consecutive quarterly decline.
Australian residents had net transactions of $19.7b in the rest of world liabilities with valuation increases of $89.6b, which resulted in $2,187.9b of rest of world assets held by Australian residents during September quarter 2015. Transactions were driven by loans and placements ($13.6b), one name paper ($3.7b) and bonds ($3.2b) this quarter. The valuation increases were driven by loans and placements ($11.9b), deposits ($6.7b) and bonds ($5.5b).
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