Moody’s downgrades outlook of big four Australian banks

Moody’s has downgraded the outlooks of the big four Australian banks and the banking system to negative.

Moody’s has warned that profit growth and asset quality could deteriorate at Australia’s biggest lenders.

Ratings agency Moody’s has downgraded the outlooks of the big four Australian banks and the banking system to negative, warning of a more challenging operating environment over the rest of this year and into the future, while conversely upgrading its outlook on mining giant Rio Tinto.

Moody’s warned that the profit growth and asset quality could deteriorate at Australia’s biggest lenders, ANZ, Commonwealth Bank, NAB and Westpac. This could mean the institutions would be more sensitive to external shocks.

Low interest rates are weighing on the banks’ profit growth, Moody’s said, while bad debts are rising and risks persist in a housing market where prices have been growing strongly and household debt is rising.

Moody’s affirmed the senior unsecured debt ratings for the banks at Aa2, saying it expects a “very high” probability the government would provide support to the banks if needed, but revised their outlooks from stable to negative.

The banks still have strong capital buffers and their balance sheets are set to keep improving as the global Basel IV capital regulations are implemented, Moody’s said.

The agency also lowered its outlook on junior lender ME Bank given its high reliance on wholesale funding, saying its growth ambitions were “aggressive”.

The banks’ outlooks could be lifted if household debt stabilises or the banks increase their capital levels, while their ratings could be cut if profits fell, problem loan ratios rose, household debts kept increasing or Australia’s credit-to-GDP ratio blew out.

Moody’s also cut its outlook for the Australian banking system to negative, adding that lower commodity prices pose “second order risks” to the banks through problem loans in resource industries and in the household sector of mining-dependent regions.

The banking system’s liquidity position is supported by holdings of substantial liquid assets, although the banks could see increasing wholesale funding requirements over the next 12 months as loan growth has outpaced deposit growth, Moody’s said.

Although the banks are still “highly profitable”, low interest rates, strong lending competition and pressure to reprice deposit books are set to pressure net interest margins, Moody’s said.

The Commonwealth Bank said Moody’s announcement “confirms that the Australian banking system remains among the strongest in the world”.

“It also reminds us that at times of global economic volatility, Australia’s major banks are under intense scrutiny from ratings agencies and global funding providers,” said CBA chief financial officer David Craig.

“Moody’s emphasis on profitability highlights the importance of profit growth in maintaining banks’ strength and the confidence of global funding providers.”

In a statement this morning confirming Moody’s move, ANZ said it had not impacted the agency’s rating of ANZ’s baseline credit or counterparty risk assessment.

Elsewhere, Moody’s increased the rating for miner Rio Tinto to stable from negative and affirmed its senior unsecured rating at Baa1, saying Rio’s performance is set to slowly improve despite continued low commodity prices.

The agency noted the miner’s cost-cutting, lower capex and reduced dividend payout, adding that leverage is set to moderate over fiscal 2016.

The moderate lift in iron ore prices is also helping performance, while copper and aluminium prices have likely bottomed, Moody’s said.

If Rio’s debt stays high, its ratings could be downgraded, but if its debt becomes more sustainable, its rating could get an upgrade, the agency said.