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Big four downgraded over housing risks

Moody’s Investors Service has downgraded the credit ratings of 12 Australian banks including the major lenders, citing ‘elevated’ debt in the housing sector.

Announcing the decision this week, the global ratings service also lowered Australia’s macro profile from ‘Very Strong --‘ to ‘Strong +’.

The four major banks had their long-term ratings downgraded from Aa2 to Aa3 while their Baseline Credit Assessments (BCAs) also dropped from a1 to a2. Their short-term ratings remain unchanged at P-1.

The long-term ratings for Newcastle Permanent Building Society and Bendigo and Adelaide Bank Limited were also downgraded from Aa2 to Aa3 while Heritage Bank Limited, Members Equity Bank Limited, QT Mutual Bank Limited, Teachers Mutual Bank Ltd., Victoria Teachers Mutual Bank and Credit Union Australia Limited dropped from A3 to Baa1.

The ratings outlooks for the four majors and Members Equity Bank Limited have also changed from stable to negative.

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Moody’s attributed the downgrade to the rise of “latent risks” in the housing market.

“Significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness,” it said.

Noting sluggish wage growth and “structural changes” in the labour market as factors in growing underemployment levels, Moody’s also cited reduced rates of savings, the rise in household leverage and increased prevalence of investment and interest-only loans as risk indicators.

“Rising house prices during 2013-17 have been accompanied with an elevated proportion of lending to residential property investors, raising some concerns over the negative impact on financial stability. Australia also exhibits very high levels of household debt, with the ratio of household debt to disposable income rising to 188.7 per cent at end-2016.”

As a result of a “very high” probability of government support in case of contingencies, the big banks’ Aa3 stable senior unsecured debt ratings continues to incorporate two notches of uplift.

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Moody’s also placed Genworth Financial Mortgage Insurance Pty Ltd’s insurance financial strength rating of A3 on review for a downgrade as a result of the same elevated risks in the housing sector.

The insurance financial strength of Westpac subsidiary, Westpac Lenders Mortgage Insurance Limited was also downgraded from Aa3 to A1, a direct result of its parent company’s downgrade.

“Moody's review will focus on the company's portfolio loss development and potential for deterioration as a consequence of the elevated risks in the household sector, its capital adequacy in light of these risks, and the sustainability of its business franchise, given the change in lender behaviour toward the retention of a greater level of risk on their own balance sheets, as well as competition from foreign-based firms.”

The announcement follows reports of rising delinquency rates and warnings of an “increased risk of a sharp correction” by S&P. 

[Related: Moody’s downgrades China’s credit rating]

Big four downgraded over housing risks
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