(19 June 2017 – Australia) Credit rating agency Moody’s has downgraded 12 Australian banks, including the “Big Four”.
The move follows that of rival ratings agency Standard and Poor’s (S&P) decision last month to downgrade credit ratings of 23 Australian financial institutions.
Moody’s Investor Services cites “elevated risks” in Australia’s household sector as a key driver for the downgrade. The group said that “risks associated with the housing market have risen sharply in recent years”, adding that Australia’s very high levels of household debt are “particularly concerning” given low income growth experienced in Australia over the past few years.
“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,” Moody’s said in a statement.
Contributing to the ratings downgrades, the group said it has changed its assessment of Australia’s Macro Profile to “Strong +” from “Very Strong -“.
Moody’s sounded a note of caution on Australian labour market conditions, noting that while unemployment remains low at 5.5 percent, rising levels of underemployment indicate spare capacity within the labor market “which could constrain wage growth over the medium term”.
As such, the group said that household sector’s resilience to weaker employment levels 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.”
Given that assessment, the group cut the long-term ratings of Australia’s four major banks — ANZ, CBA, NAB and Westpac — to Aa3 from Aa2, with a stable ratings outlook.
Moody’s noted some recent efforts to slow investor lending, but noted Australia’s record levels of household debt. It said:
“Whilst capital adequacy is likely to strengthen further — as a result of regulatory action — and macro prudential measures will alleviate a further build-up of risks, the very high level of household sector indebtedness will take a considerable period of time to unwind.
“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 group said. “While Moody’s does not anticipate a sharp housing downturn as a core scenario, the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks.”