Banks could to forced to ration credit if conditions in world debt markets get any worse, according to Suncorp Metway Ltd chief financial officer Chris Skilton.

Mr Skilton said improvements in funding conditions for banks had partly reversed at the time ANZ Banking Group Ltd and National Australia Bank Ltd announced big writedowns.

“While further deterioration is unlikely, it clearly cannot be ruled out,” he told analysts.

“And if this occurs, I think we, along with other participants in the industry, will need to be prepared to act.

“And I suspect this would manifest itself in a shortening of liability duration across the industry and/or by further curtailing already slowing lending growth, or even credit rationing.”

“However, our 2008/09 balance sheet starting point means I think that we are well placed to respond to these dynamics.”

Mr Skilton said Suncorp expected bad loan impairments to increase as economic conditions deteriorated.

However, given the relatively low loan-to-valuation ratios across its home loan book, he said Suncorp was not expecting a material increase in arrears in that segment.

In 2007/08, impaired loans at Suncorp’s bank almost tripled to $71 million from $25 million a year earlier.

Total non-performing loans in 2007/08 were 1.12 per cent of risk weighted assets, with write-offs at a bit less than 20 basis points.

“That’s still a good performance in a deteriorating economic environment,” chief executive John Mulcahy said.

Mr Skilton said credit quality in the bank’s loan book remained sound, but he added that the bank was operating in uncertain times.

“In these extraordinary times, historical precedents can provide little comfort,” Mr Skilton said.

Mr Skilton said Suncorp’s mix of business meant that, through the cycle, actual loan write-downs would continue to be 60 to 70 per cent compared to the major banks.

AAP