Coronavirus: Global ratings agency Moody’s downgrades credit outlook for Australian banking system

Capital buffers are expected to deteriorate ‘in the event of a deep and prolonged economic slowdown’.

CBA, Westpac, ANZ and NAB are among the banks with the highest credit ratings in the world, thanks in part to Australia’s triple-A sovereign rating. Picture: AAP

Global ratings agency Moody’s has downgraded the credit outlook for the Australian banking system despite dramatic intervention by the Morrison government and the Reserve Bank to shore up companies and borrowers amid the coronavirus pandemic.

In a note sent to clients on Thursday, Moody’s senior credit officer Francesco Mirenzi said the agency had lowered the outlook for the banking system to “negative”, revised downward from its previous “stable” outlook, due to the “broad and growing scope” of the stress the economic shutdown will have on profits and loan repayments.

A move by the Reserve Bank of New Zealand on Thursday to block Kiwi-based banks from paying dividends would also hit the big four Australian banks, Moody’s said.

The big four banks — Commonwealth Bank, Westpac, National Australia Bank and ANZ — also operate the largest four lenders in New Zealand, and dividends paid by their Kiwi subsidiaries contributed to the capital buffers of the Australian parent banks.

While Mr Mirenzi said the lenders were currently well capitalised, the lenders’ capital buffers were likely to deteriorate “in the event of a deep and prolonged economic slowdown”.

"While Australian banks' current asset quality is very strong, it will deteriorate significantly if disruptions persist for a prolonged period and push up the unemployment rate, which will lead to more impairments of residential mortgages, which comprise approximately two thirds of banking system loans,” Mr Mirenzi said.

Despite a six-month holiday on loan repayments instituted by the banking sector, a $90bn term-funding facility opened up by the Reserve Bank to help small businesses access loans, and a $130bn wage subsidy plan launched this week by Scott Morrison and Josh Frydenberg designed to support workers and save jobs, Moody’s said asset quality in bank portfolios would still deteriorate.

Mr Mirenzi said retailers, hoteliers, entertainers, education providers, tourism businesses and airlines would cop the “most severe” impact from the economic shutdown. Retail and hospitality accounts for nearly 17 per cent of the Australian workforce.

"Loan-loss charges will increase and revenue will decline as net interest margins narrow in the low interest rate environment. Loan volumes will decrease as economic conditions deteriorate, offering little room for revenue growth,” Mr Mirenzi said.

CBA, Westpac, ANZ and NAB are among the banks with the highest credit ratings in the world, thanks in part to Australia’s triple-A sovereign rating.

The big four all have double-A credit ratings from all three major ratings agencies, Moody’s Standard & Poor’s and Fitch Ratings.

Second tier lenders and mutual banks are rated mostly single-A or triple-B.