Bank headwinds rising: Moody’s

Australia’s big four banks are becoming more vulnerable to economic shocks, Moody’s ratings agency has warned.

The headwinds facing the big four banks are increasing, making them more vulnerable to economic shocks, ratings agency Moody’s has warned today.

The anxiety from Moody’s follows a move from rival credit ratings agency Standard & Poor’s to place the nation’s largest banks on ‘credit watch negative’ last week.

Moody’s stopped short of doing the same, but said rising household debt and consistently low interest rates made the banks more sensitive to shocks.

“These headwinds could, over time, put pressure on the credit profiles of Australia’s major banks, particularly in the context of their very high ratings,” Frank Mirenzi, a Moody’s Vice President and Senior Analyst, said.

“Whilst solvency and liquidity buffers have improved in recent years, the path of future balance sheet strengthening is likely to be slower than in previous years -- at a time when risks continue to rise.”

The big four – ANZ, Commonwealth Bank, NAB and Westpac – all currently hold a rating of Aa2 at Moody’s, with a ‘stable’ outlook.

Moody’s concerns are partially tied to robust property price growth, with the ratings agency saying risks in the housing market had consequently risen.

“A combination of low nominal income growth and buoyant housing conditions in the key Sydney and Melbourne markets have led to an increase in household debt and overall credit-to-GDP ratios,” Moody’s said.

“Coupled with bank portfolios that have unusually high levels of concentration to residential mortgages, Moody’s believes that risks to Australian banks are increasingly skewed to the downside.”

The prospect of further rate cuts from the Reserve Bank is seen as a risk factor for the sector as analysts doubt whether the big four could maintain margins through further cuts, particularly given new regulatory requirements are seen likely to ramp up competition for retail deposits.

“If, at the same time, tighter housing loan underwriting criteria increase price competition for lower-risk loans, then bank margins may be squeezed and become increasingly sensitive to volatility in wholesale market funding costs,” Moody’s said.

The commentary comes on the same day Moody’s noted the Coalition government’s mandate had been weakened by the election, casting a cloud over the nation’s top credit rating.