Moody’s cuts credit ratings of Australian banks on household risks

The Australian 5:57pm June 19, 2017

Michael Roddan

Global ratings agency Moody’s has slightly downgraded the credit ratings of a number of Australian banks, including the big four lenders, on rising risks in the housing market and exploding levels of household debt.

The move follows similar ratings action by Standard & Poor’s, which last month downgraded 23 small Australian banks on the increased potential for a sharp correction in property prices.

Moody’s took the scalpel to 12 Australian lenders, including the four major banks Commonwealth Bank, Westpac, National Australia Bank and ANZ Banking Group, after elevated risks in the household sector raised the vulnerability of the sector to an “adverse shock”.

Along with the four majors, which had their longer-term ratings cut slightly from Aa3 to Aa2 and their baseline credit assumptions nipped from A1 to a2, other banks suffering a downgrade included Bendigo and Adelaide Bank, Heritage Bank, ME Bank, Newcastle Permanent, QT Mutual, Teachers Mutual, Victoria Teachers Mutual; and Credit Union Australia.

“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,” Moody’s senior credit officer Francesco Mirenzi said.

Mr Mirenzi said surging house prices, rapidly increasing household debt and rising levels of underemployment combined with riskier loan types held by interest-only borrowers and investors, all combined to heighten the risks in the housing market.

He said a household debt to income ratio of 189 per cent was “particularly concerning”, especially when compared to the below-average economic growth recorded by the wider economy.

“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,” he said.

While Moody’s has left the major banks on a double-A rating, albeit slightly weaker, Standard & Poor’s chose not to take any ratings action on the major banks and Macquarie when it downgraded nearly two dozen smaller lenders in May. This, it said, was due to the likelihood the larger lenders would receive substantial government support in a crisis.

Moody’s said its ratings for the major bank still assumed the expectation of “very high” likelihood of government support if it was needed. Macquarie also benefited from a “high” level of expected taxpayer rescue.