Moody's downgrades Aussie banks on back of household debt pile

Moody's didn't think a sharp housing downturn was a core scenario, but said it had to take into account the risk posed ...
KARL HILZINGER/FAIRFAX

Moody's didn't think a sharp housing downturn was a core scenario, but said it had to take into account the risk posed by increasing household debt.

Credit rating agency Moody's has downgraded a dozen Australian banks, including the big four, citing increased risks in the nation's increasingly indebted households.

Moody's stripped the big four banks - the Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), and Westpac Banking Corporation (Westpac) - of their Aa2 long-term rating and placed them on the next level down at Aa3, although it did not alter their short term ratings.

All four banks also operate in New Zealand - CBA owns ASB, and NAB owns BNZ.

Other smaller Australian banks were also downgraded including Bendigo and Adelaide Bank, Members Equity Bank Limited and Credit Union Australia Limited.

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The big four banks had been on a negative outlook but that had now been changed to stable, Moody's said in a statement released on Monday night.

"In Moody's view, elevated risks within the household sector heighten the sensitivity of Australian banks' credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years," the statement said.

Moody's did not think a "sharp housing downturn" was a "core scenario", but the risk posed by increasing household debt had to be considered when weighing the ratings of Australian banks.

"In Moody's assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness," the statement said.

"The rise in household indebtedness comes against the backdrop of low wage growth and structural changes in the labour market, which have led to rising levels of underemployment.

"Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks."

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It comes after Standard & Poor's recently left overall the big four Australian banks' credit ratings untouched as it downgraded smaller lenders. However, Standard & Poor's did cut the underlying ratings for the big banks but left the headline ratings intact based on its assessment of the value of government guarantees.

In a similar way Moody's cut the underlying ratings, but it did not apply as much value to the government guarantees thus producing a drop in the headline rating.

Regal Funds Management senior analyst Omkar Joshi said the Moody's downgrade may lead to a marginal increase in the banks' funding costs.

"Even if S&P downgrades the banks, it's likely to drive a 10 to 15 basis point increase in their wholesale funding, which is not hugely significant for their net interest margin," Joshi said.

Wholesale funding accounts for about a third of the banks' funding. But as the debt typically rolls over every four to five years, wholesale debt costs only have a gradual impact on the total costs facing banks.

Sean Keane of Triple T Consulting said the cut did not appear likely to affect the federal government's credit rating, at least in the short term. He noted that it was not a "blanket Australia downgrade", as several smaller banks had not suffered a ratings cut.

"We don't see this announcement as having an immediate impact on the sovereign rating given that the recent government Budget was accepted by the rating agencies and the market as recently as May, and little has changed since that time," Keane said.

ANZ Bank and Westpac noted the Moody's decision in notices to the stock exchange on Monday night.

Moody's noted that Australia exhibited "very high levels of household debt", with the ratio of household debt to disposable income rising to 188.7 per cent at the end of last year.

"This situation is particularly concerning, against the backdrop of low nominal income growth experienced in Australia over the past few years," it said.

"Whilst unemployment remains low — at 5.5 per cent as at May 2017 — rising levels of underemployment indicate spare capacity within the labor market, which could constrain wage growth over the medium term.

"The household sector's resilience to weaker employment levels and/or rising interest rates has materially reduced. Any increase in household sector stress would have the potential to weaken consumer confidence and consumption, creating negative second and third order impacts on overall economic activity and, accordingly, bank balance sheets."

Moody's noted that the banks were taking steps to strengthen their balance sheets but "the very high level of household sector indebtedness will take a considerable period of time to unwind.

"The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness," it said.

 - Sydney Morning Herald

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