Credit ratings agency Moody’s has revised its ratings for Australia’s big banks, placing them on a negative outlook.
While this does not change the Moody’s rating for the ANZ, Westpac, National Australia Bank and Commonwealth Bank, who are all rated Aa2 for senior unsecured debt, it does reflect a “more challenging operating environment for banks in Australia for the remainder of 2016 and beyond”.
Moody’s says this “could lead to a deterioration in their profit growth and asset quality, as well as an increase in their sensitivity to external shocks”.
The outlook change follows the release of results and trading updates from the banks, which showed pressure on margins and revenue growth and early signs of rising bad debts, although these remain at historically low levels.
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 per cent 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 per cent of disposable income …and accompanying house price appreciation.
“Despite the macro-prudential measures put into place by the Australian regulatory authorities in 2015 – which have had some success in shifting the composition of residential property lending towards less risky products – house prices and debt levels remain at historically high levels.
“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.”
Moody’s recently downgraded its outlook for the Australian economy to ‘Very Strong-‘ from ‘Very Strong’. While the agency is forecasting “robust” GDP
growth of between 2.5 per cent and 3.5 per cent, it says the “economic transition has been uneven with regions and sectors exposed to the commodities cycle undergoing material challenges”.
Despite the outlook change, Moody’s said the big four banks remain will positioned. “Despite these headwinds, Australian banks maintain strong buffers in terms of capital, improved liquidity profiles and structurally high profitability.”
Moody’s also changed its outlook for ME Bank, but left its ratings for 13 other financial institutions – including Australia’s regional banks, the subsidiaries of foreign banks operating in Australia, mutual banks, credit unions and building societies, and other selected banks – unchanged, saying it “considers their balance sheet settings to be sufficient to withstand deteriorating operating conditions at their current rating levels”.