Moody’s downgrades Australian banks’ credit ratings, Big Four share prices fall

Alison Banney 20 June 2017

Big Banks 738

12 banks including the Big Four’s credit ratings have been downgraded.

Leading global ratings agency Moody’s has last night downgraded the credit rating of 12 Australian banks including the Big Four: ANZ, CBA, NAB and Westpac.

In addition to the Big Four, Moody’s also downgraded the rating of Bendigo and Adelaide Bank, Heritage Bank, Members Equity Bank, Newcastle Permanent Building Society, QT Mutual Bank, Teachers Mutual Bank, Victoria Teachers Mutual Bank and Credit Union Australia.

Each of the banks was downgraded by one notch. The Big Four’s ratings decreased from Aa2 to Aa3, while Newcastle Permanent Building Society and Bendigo and Adelaide Bank were downgraded from A2 to A3. The remaining five banks were downgraded from A3 to Baa1.

This downgrade only applies to the banks’ long-term credit ratings. Their short-term ratings remain untouched.

Moody’s statement

In its statement last night, Moody’s cited increased risks in Australia’s housing sector and flat wage growth as the influencing factors for the downgrade.

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

What will increase the banks’ ratings?

Moody’s statement said that while it doesn’t expect the ratings to increase again in the medium term, “bank outlooks could be revised to positive if the operating environment in Australia improves, with a stabilization in household leverage, nominal income and house price metrics, and/or the banks further improve their capitalization and funding/liquidity profiles.”

Following the downgrade last night, the share price across the Big Four banks has dropped. Westpac fell by 1.1% this morning, with ANZ, CBA and NAB each dropping by between 0.5% and 0.9%. The Australian dollar also fell overnight.

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