From Moody’s:
Moody’s Investors Service has today affirmed the ratings of all Australian banks, but revised the rating outlooks of five banks to negative from stable.
The banks with revised outlooks include Australia’s four major banks, Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB), and Westpac Banking Corporation (Westpac). All four banks are rated Aa2 for senior unsecured debt.
Moody’s has also revised the rating outlook of Members Equity Bank Limited (ME Bank). The bank is rated A3 for senior unsecured debt.
The outlook change for Australia’s four major banks reflects Moody’s expectation of a more challenging operating environment for banks in Australia for the remainder of 2016 and beyond, which could lead to a deterioration in their profit growth and asset quality, as well as an increase in their sensitivity to external shocks.
In particular, the rating action reflects (a) Australia’s ongoing economic transition which, despite stable aggregate economic growth, has resulted in low nominal income and wage outcomes and persistently low interest rates, exerting in turn downward pressure on the banks’ profit growth; (b) Moody’s continued concerns regarding 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; and (c) rising bad debt within parts of the banks’ lending portfolios, in part reflecting these pressures.
The more challenging operating environment has been reflected in Moody’s change of Australia’s Macro Profile to ‘Very Strong-‘ from ‘Very Strong’.
The outlook change for ME Bank reflects its high reliance on wholesale funding and potential pressures on capitalisation, given the bank’s growth ambitions, which are aggressive relative to its ability to generate organic capital. These factors could place the bank in a weaker position to withstand the operating environment challenges noted above.
Despite these headwinds, Australian banks maintain strong buffers in terms of capital, improved liquidity profiles and structurally high profitability.
For ME Bank, the rating affirmation reflects its very strong asset quality and demonstrated ongoing support from its shareholders: as at 18 August 2016, ME Bank had pre-committed capital of $109 million from its shareholders which include some of Australia’s largest industry superannuation funds.
As a result, Moody’s has affirmed the credit ratings of all five banks whose outlooks have been revised, as well as their baseline credit assessments (BCAs), adjusted BCAs, and counterparty risk assessments (CR Assessments), as applicable.
For 13 other Australian financial institutions, Moody’s considers their balance sheet settings to be sufficient to withstand deteriorating operating conditions at their current rating levels. These institutions include Australia’s regional banks, the subsidiaries of foreign banks operating in Australia, mutual banks, credit unions and building societies, and other selected banks.
Broadly, these 13 institutions are characterised by strong capital and liquidity buffers relative to expectations for their current ratings and, particularly in the case of the mutual banks, credit unions and building societies, by the conservative management of their loan portfolios. Moody’s has affirmed the credit ratings, baseline credit assessments (BCAs), adjusted BCAs, and CR Assessments of these institutions and some associated entities, as applicable. The outlooks on their ratings remain unchanged.
In short, Moody’s just slapped Australia’s current account deficit funding machine on downgrade watch.
