Credit rating agency Moody’s has joined rival Standard & Poor’s in downgrading Australia’s banks.
But unlike S&P, Moody’s cut includes the big four banks – Westpac, CBA, ANZ and NAB – and like S&P it justified the rating cuts to rising household debt.
Moody’s stripped the big four of their Aa3 long-term rating and placed them on the next level down at Aa2, but it did not alter their short term ratings.
The downgrade came after trading ended for the day on Monday which saw ANZ, CBA, and Westpac all gain around 1%, while NAB was up 1.5%.
That in turn was after solid performances last week by three of the four – the Commonwealth Bank was up 3.4%, Westpac was up 1.9%, National Australia Bank 1.5%, but the ANZ was down 09% – as investors rediscovered their appetite for the quartet in the wake of the sell off triggered by the Federal Government’s bank levy.
The Federal Government’s bank levy was passed by Federal Parliament on Monday night with the support of the Labor Party, but with a review in two years time included.
Yesterday’s downgrade was noted in statements last night to the ASX from ANZ Bank and Westpac.
Other smaller banks were also downgraded including Bendigo and Adelaide Bank, Members Equity Bank Limited and Credit Union Australia Limited.
"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.
Unlike some more nervous analysts, Moody’s did not think a “sharp housing downturn” was a “core scenario” and 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."
Interestingly Moody’s played down the implicit government guarantee when assessing the rating of the big four, unlike S&P in its cuts in May.
S&P 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.
Moody’s cut the underlying ratings but it did not apply as much value to the government guarantees as S&P did, thereby producing a drop in the headline rating.
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 said 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.
Moody’s also said that the long-term ratings of Newcastle Permanent Building Society and Bendigo and Adelaide Bank Limited were downgraded to A3 from A2, with those from Heritage Bank, Members Equity Bank, Newcastle Permanent Building Society, QT Mutual Bank, Teachers Mutual Bank, Victoria Teachers Mutual Bank and Credit Union Australia downgraded to Baa1 from A3.
