A credit rating warning for Australia’s big banks as they struggle with the new tax from Canberra on top of concerns about home lending and house prices, not to mention high levels of consumer debt?
The credit rating agency, Moody’s has cut the long term ratings of six of the country’s largest lenders, Toronto-Dominion Bank (TD), Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and the Royal Bank of Canada by a notch late on Wednesday, because of those fears so familiar to Australians – high house prices and high consumer debt.
The move left TD with a long-term debt rating of Aa2, the third-highest level. Moody’s lowered the other five to A1, the fifth-highest. The outlook remains negative on all six lenders.
Moody’s put Australia’s big four banks on a creditwatch negative rating midway through 2016, citing a weak outlook, rising debt, low wage growth and rising house prices.
Moody’s rates the ANZ, Westpac, National Australia Bank and Commonwealth Bank, all rated Aa2 for senior unsecured debt, but warned in its creditwatch negative statement last August that they are facing a “more challenging operating environment for banks in Australia for the remainder of 2016 and beyond”.
Moody’s said this "could lead to a deterioration in their profit growth and asset quality, as well as an increase in their sensitivity to external shocks". Moody’s said it was particularly concerned about the pressure on the bank’s profit growth coming from low wage growth and low interest rates, plus the banks’ "exposure to tail-risks in the Australian housing market, which has been characterised over the recent past by strong price appreciation and rising household debt".
The bad debt outlook also concerns the ratings agency, given the “increase in private sector credit as a share of GDP to an estimated 155% at March 2016 from 143 per cent at end-2013".
“This increase has been led by household debt which is now at a record high of 187% of disposable income …and accompanying house price appreciation<“ Moody’s said last August.
Overnight, Moody’s analysts cited similar concerns over growing Canadian consumer debt levels and high housing prices as the reason behind the move.
“Today’s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future,” said David Beattie, a senior vice president at Moody’s.
“Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.”
The downgrade – the first in more than four years – sent shares in the six banks down between 0.7% to 2.1% – as a lower rating could increase the cost of borrowing for the companies in question.
Moody’s noted Canada’s record-high debt-to-income ratio of 167% as cause for concern, and said debt levels are now beyond the usual risk models in place to determine whether businesses could withstand a crisis.
Moody’s noted that debt held by consumers and private businesses in Canada has ballooned to 185% of GDP at the end of 2016, up from 179.3% in 2015. That’s a lot of additional debt in a short period of time, and “we don’t quite know how well household balance sheets would hold up in a serious recession,” the ratings agency noted.
The news comes as troubled Canadian “alternate”, or sub-prime mortgage lender Home Capital and others in the sector have hit problems with rising deposit withdrawals and bad debts.
These fears have triggered wider concerns about whether Canada is about to experience its very own housing and debt crisis, some 10 years after the global financial crisis. The Moody’s downgrade is not seen as being helpful to investor sentiment.
