SECTORAL ANALYSIS

NON-FINANCIAL CORPORATIONS

During March quarter 2017, private non-financial corporations invested $38.7b, funded through gross saving of $24.4b and net borrowing of $13.7b (change in net financial position). Net borrowing was as a result of incurring liabilities of $12.8b, mainly through equity issuance of $12.3b. Private non-financial corporations disposed of $2.2b in assets, which was driven by settlements of other accounts receivable ($4.6b) and derivatives ($1.7b), and disposal of bonds ($1.3b), these were offset by acquisition of loans ($2.9b) and equity ($2.4b).

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 0.67 in March quarter 2017, decreasing slightly from December quarter 2016 ratio of 0.69. This is the lowest the ratio has been since December quarter 2007.

In contrast, the adjusted debt to equity ratio was 1.10 in March quarter 2017. This ratio has been moving downwards for the last 14 quarters, indicating that private non-financial corporations have a declining ‘real’ level of debt to equity.


FINANCIAL CORPORATIONS

		Outstanding at end	Transactions during	Other changes during	Outstanding at end
		Dec Qtr 2016	Mar Qtr 2017	Mar Qtr 2017	Mar Qtr 2017
		$b	$b	$b	$b
Assets of financial corporations
	Central bank	178.8	5.9	-1.8	182.9
	Banks	3 512.3	-24.6	-15.2	3 472.5
	Other depository corporations	296.7	0.1	-1.7	295.2
	Pension funds	2 014.5	20.9	30.3	2 065.8
	Life insurance corporations	224.5	-0.7	-1.3	222.4
	Non-life insurance corporations	178.8	1.1	0.6	180.5
	Money market investment funds	37.2	-0.9	0.0	36.3
	Non-money market investment funds	329.6	6.7	4.1	340.5
	Central borrowing authorities	363.0	-2.4	-0.1	360.5
	Securitisers	466.4	2.1	0.0	468.5
	Other financial corporations	121.8	-0.3	2.4	123.8
Liabilities of financial corporations
	Central bank	177.4	6.8	-2.2	182.0
	Banks	3 788.7	-33.8	8.3	3 763.3
	Other depository corporations	209.4	2.1	-1.1	210.4
	Pension funds	2 143.1	18.9	33.6	2 195.6
	Life insurance corporations	227.3	-0.6	0.6	227.3
	Non-life insurance corporations	227.4	0.0	1.2	228.6
	Money market investment funds	37.2	-1.1	0.2	36.3
	Non-money market investment funds	401.6	8.5	4.1	414.2
	Central borrowing authorities	376.0	2.9	-0.4	378.5
	Securitisers	461.3	-2.2	4.0	463.1
	Other financial corporations	102.8	-0.2	-0.8	101.9

During March quarter 2017 financial corporations acquired $1.3b in assets. These transaction in assets were driven by acquisition of bonds ($15.6b) and short term debt securities ($11.4b) and issuance of other accounts receivable ($7.7b). These were offset by settlement of derivative accounts ($31.4b). Financial corporations disposed of $5.3b liabilities, driven by maturities of derivative contracts ($32.4b) and bonds ($11.2b), which were offset by transactions in insurance technical reserves ($17.1b).

Graph 2. Banks liabilities as a proportion of their assets


Banks’ funding of their total assets through deposits increased to 60.3%, which is the highest proportion seen in the time series. The proportion of bank debt securities as a source of funding was flat this quarter, while the proportion of funding from equities increased slightly to 17.1%.

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


Graph 3 illustrates the financial asset mix at the end of March quarter 2017 of pension funds, life insurance corporations and non-money market investment funds. Overall, these three institutional sectors invest predominately in equity assets.

During March quarter 2017, pension funds increased shares and other equity holdings by 2.1%, driven by revaluations of $28.6b. At the end of March quarter 2017, pension funds held $1,295.9b in shares and other equity (62.7% of their financial assets), of which $886.4b were issued by domestic sectors and $409.6b were issued by the rest of world.

At the end of March quarter 2017, life insurance corporations held $175.8b in shares and other equity (79.0% of their financial assets), an increase of 3% from the December quarter 2016. Life insurance corporations predominately hold shares and other equities in non-money market financial investment funds ($137.3b) and other private non-financial corporations ($17.2b).


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 March quarter 2017 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $2,171.0b and $59.6b respectively, while shareholders of life insurance corporations had claims of $22.2b. Of the total $2,195.6b assets of pension funds, 48.9% was invested through investment managers, 45.1% was directly invested in financial markets and 6.0% was invested directly in life insurance corporations.


GENERAL GOVERNMENT

During March quarter 2017, general government invested $13.8b in gross fixed capital formation, with state and local general government accounting for the majority of this investment ($9.7b). National general government invested $4.1b in gross fixed capital formation. State and local general government and national general government recorded gross saving of $7.1b and $4.1b respectively during the quarter. State and local general government and national general government were net borrowers in March quarter 2017.

Graph 4. Change in net financial position, General government


National General Government

During March quarter 2017, the net change in financial position for national general government was -$3.3b. This was made up of national general governments borrowing $18.7b and acquiring $15.4b in assets. The borrowing was predominately driven by $17.2b in issuances of Commonwealth government bonds.

At the end of the March quarter 2017, national general government had total assets of $555.3b and total liabilities of $959.9b.


State and Local General Government

During March quarter 2017, the net change in financial position of state and local general government was $6.2b. State and local general government acquired $6.2b of assets, while incurring a net $0.1b of liabilities. This net acquisition of assets was driven by loans and placements ($5.7b). State and local general government's net incurrence of liabilities was driven by unfunded superannuation claims, offset by the repayment of loans. At the end of March quarter 2017, state and local general government had total assets of $509.3b and total liabilities of $335.2b.


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 March quarter 2017, the Commonwealth government issued $17.2b of bonds. For state and local general government, the central borrowing authorities are responsible for the issuance of their debt.

Central borrowing authorities net incurrence of liabilities was $2.9b and was driven by short-term loan borrowings ($4.3b). Central borrowing authorities disposed of $2.4b of financial assets, this was driven by the withdrawal of deposits. At the end of March quarter 2017, central borrowing authorities had total assets of $360.5b and total liabilities of $378.5b.


REST OF WORLD

Australia’s net international investment position at the end of March quarter 2017 was a net foreign liability of $1,025.5b (net financial asset position of the rest of world), a decrease of $2.7b from the previous quarter with net transactions of $5.5b (net change in financial position) and valuation decreases of $8.2b.

Non-residents investment transactions in Australian assets were -$30.1b, with valuations of -$18.3b. This resulted in a decrease of their holdings of Australian assets to $3,200.1b during March quarter 2017. The negative transactions were driven by settlement of derivative contracts ($32.1b) and a disposal of deposits ($8.8b), these were offset by the acquisition of equities ($15.2b). The valuation decreases were driven by bonds issued ($15.1b) and deposits of $6.1b.

During March quarter 2017, non-residents decreased their liabilities to Australia, with net transactions of -$35.6b and valuations of -$10.2b, resulting in $2,174.6b of rest of world assets held by Australian residents. The transactions were driven by a settlement of derivative contracts ($30.8b), repayments of loans borrowing ($15.7b) and acceptance of deposits ($10.5b), partially offset by issuance of one name paper ($14.0b). The negative valuations were driven by the derivatives market ($16.7b) and bonds ($6.2b), offset by positive revaluations in unlisted shares and other equities ($19.2b).