Credit rating group, Moody’s Investors Service has revised its outlook on Australia’s banks to negative, warning that their profit growth could be hit by to weak wage growth, low interest rates, strong lending competition and rising household debt.
Moody’s maintained the banks’ long term rating at AA2, but downgraded their outlook from stable to negative. But it is likely to have little impact on their ability to borrow at home or offshore, or on the costs of those borrowings given the preponderance of negative yielding securities now on offer in the UK, Europe, Japan and other markets.
The decision, revealed overnight, is despite Moody’s reaffirming Australia’s sovereign rating at AAA stable – the highest there is – a day earlier. The cut means there is a much larger difference between the sovereign rating and the ratings outlook for the bank which indicates a possible downgrade in the next 18 months.
In a press release issued last night, Moody’s said the change reflects “expectation of a more challenging operating environment for banks in Australia for the remainder of 2016 and beyond, which could lead to a deterioration in their profit growth and asset quality, as well as an increase in their sensitivity to external shocks.”
The ANZ acknowledged the change in outlook on Friday morning, but noted that Moody’s had reaffirmed ANZ’s ‘Aa2’ rating, as did the Commonwealth whose Chief Financial Officer, David Craig, said in the statement that “the announcement confirms that the Australian banking system remains among the strongest in the world. It also reminds us that at times of global economic volatility, Australia’s major banks are under intense scrutiny from ratings agencies and global funding providers."
"Moody’s emphasis on profitability highlights the importance of profit growth in maintaining banks’ strength and the confidence of global funding providers. It is this strength and confidence which enable the Bank to access and provide low cost funding for our customers,” Mr Craig added.
So far this year all four big banks have revealed increases in impaired loans and provisions for bad and doubtful debts, and have nominated worsening small business and mortgages in the mining states of Queensland and WA. They have also reported a rise in bad and problem loans from the NZ dairy industry.
This could potentially lift the cost of the banks fund raising, but with so many issues from governments and corporates now at negative yields around the world, the banks will continue to be knocked down in the rush by big global investors to buy high yielding (relatively to the negative yields) and high rated securities.
