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During September Quarter 2016, private non-financial corporations invested $42.8b in gross fixed capital formation, this was funded through gross saving (net saving plus consumption of fixed capital) of $21.5b and net borrowing of $25.1b (change in net financial position). This net borrowing figure was as a result of incurring financial liabilities of $35.9b, mainly due to equity issuance of $28.4b. Private non-financial corporations acquired $12.2b in financial assets, which was driven by an increase in deposits of $7.2b and equity holdings of $4.3b.
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 0.71 in September quarter 2016, a slight decrease of 0.02 from June quarter 2016. This ratio has remained relatively flat, recording ratios between 0.71 and 0.78 for the last 17 quarters.
In contrast, the adjusted ratio was 1.17 in September quarter 2016, recording a slight fall from the June quarter 2016 ratio of 1.20. The adjusted ratio reflects the removal of price change from the original series and therefore provides an indicator of leverage without the market price changes. This ratio has been trending downwards for the last 12 quarters and is 0.16 lower than in September 2013. This indicates that private non-financial corporations have a declining 'real' level of debt to equity.
FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS
During September quarter 2016 financial corporations acquired $2.2b in financial assets. Loans to households ($21.5b) and private non-financial corporations ($10.2b), along with the acquisition of $19.2b in shares and other equity drove the acquisition in assets. These gains were offset by decreases in loans to the rest of the world (-$10.1b) and short term debt securities (-$15.1). To fund their asset acquisition, financial corporations incurred liabilities driven by increased deposits and offset by bond and short term debt security maturities and derivatives.
Graph 2. Banks liabilities as a proportion of their assets
In September quarter 2016, deposits, debt securities and equity comprised 97.1% of total bank funding, increasing from June quarter 2016 (95.2%). Banks funding of their total assets through deposits increased to 58.8%, with net transactions totalling $61.3b. The proportion of bank debt securities (23.2%) decreased slightly during the quarter due to both decreased issuance and growth in deposit liabilities.
Financial asset portfolio of pension funds, life insurance corporations and non-money market investment funds at end of quarter
Graph 3. Assets of Pension funds, Life insurance corporations and Non-money market investment funds
Source(s): Table 18. Financial Assets and Liabilities of Pension Funds ($ 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 September 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 September quarter 2016, pension funds increased shares and other equity holdings by $97.0b or 8.6%, driven by transactions ($57.7b) and revaluations ($39.3b). At the end of September quarter 2016, pension funds held $1,221.4b in shares and other equity (62.3% of their financial assets) of which $835.5b were issued by domestic sectors and $385.9b were issued by the rest of world.
At the end of September quarter 2016, life insurance corporations held $162.5b in shares and other equity (73.8% of their financial assets), a decrease of $69.3b or 29.9%. Life insurance corporations predominately held shares and other equities in non-money market financial investment funds ($126.7b) and other private non-financial corporations ($13.4b).
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 2016 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $2,054.7b and $58.5b respectively, while shareholders of life insurance corporations had claims of $23.5b. Of the total $2,080.0b assets of pension funds, 48.3% was invested through investment managers, 45.4% was directly invested in financial markets and 6.3% was invested directly in life insurance corporations.
During September quarter 2016, general government invested $11.8b in gross fixed capital formation with state and local general government ($8.0b) accounting for majority of this investment. National general government invested $3.7b in gross fixed capital formation. State and local general government and national general government recorded gross saving of $4.3b and -$10.2b respectively during the quarter. State and local general government and national general government were net borrowers in September quarter 2016.
Graph 4. Change in net financial position, General government
National General Government
During September quarter 2016, the net change in financial position (net borrowing) for national general government was -$16.0b. This was driven by the national general government incurring $21.9b in financial liabilities while acquiring a net $5.9b in financial assets. The net incurrence of liabilities was predominately driven by $24.2b in net issuances of Commonwealth government bonds.
At the end of the September quarter 2016, national general government had total financial assets of $523.7b and total liabilities of $941.4b.
State and Local General Government
During September quarter 2016, the net change in financial position (net borrowing) of state and local general government was -$2.1b. State and local general government incurred $6.2b in financial liabilities and acquired $4.1b in financial assets.
The net acquisition of financial assets was due to increase in deposits ($3.9b).
State and local general government's net incurrence of financial liabilities was driven by loan borrowings ($3.5b).
At the end of September quarter 2016, state and local general government had total financial assets of $489.7b and liabilities of $352.7b.
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 September quarter 2016, Commonwealth government issued $24.3b 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 (-$1.9b) were driven by long-term loan repayments (-$2.7b) and decreases in accounts payable (-$2.7b) which was partially offset by bonds issuance of $3.0b. At the end of September quarter, central borrowing authorities had total assets of $366.4b and total liabilities of $389.1b. Central borrowing authorities disposed of $6.8b in financial assets, which was driven by withdrawals of deposits (-$6.4b).
REST OF WORLD
Australia’s net international investment position at the end of September quarter 2016 was a net foreign liability of $1,043.3b (net financial asset position of the rest of world), an increase of $5.4b from the previous quarter with net transactions of $15.9b (net change in financial position) offset by valuation decreases of $10.5b.
Non-residents investments in Australian financial assets recorded valuation increases of $8.3b, offset by net transactions of -$30.5, which resulted in a decrease in their holdings of Australian financial assets to $3,192.2b during September quarter 2016. The negative transactions were driven by derivatives (-$47.2b), short term debt issuance (-$8.2b), and loans (-$7.6b), offset by equities ($20.8b) and deposits ($17.1b). The valuation increases were driven by equities ($14.2b) and derivatives ($12.0b), and offset by bonds issued in Australia (-$10.3b) and deposits (-$6.3b).
During September quarter 2016, non-residents decreased their financial liabilities to Australia, with net transactions of -$46.3b and valuation increases of $18.7b, resulting in $2,148.9b of rest of world assets held by Australian residents. The negative transactions were driven by derivatives (-$43.4b), loans (-$11.7b), and short term debt issuance (-$10.6b), and partially offset by increased issuance of unlisted shares and equity ($10.4b), and acceptance of deposits ($7.2b). The valuation increases were driven by increases in unlisted shares and other equities ($20.1b) and derivatives ($7.7b), and offset by valuation decreases in deposits ($5.0b) and other accounts payable ($4.7b).
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