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Non-majors downgraded amid default risks

Growing credit quality concerns have prompted ratings agency Moody’s to downgrade the issuer ratings and outlooks for several non-major banks.

Moody’s Investors Service has announced changes and reviews to the issuer credit ratings and outlooks for Qudos Bank, MyState Bank, ME Bank and IMB Ltd.

Quods Bank’s long-term issuer ratings and assessments have been downgraded, with its outlook also revised from “stable” to “negative”.

Moody’s has also placed on review for downgrade all ratings of MyState Bank while also revising its outlook on ME Bank and IMB Ltd from “stable” to “negative”.

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The revisions come just weeks after the ratings agency downgraded its overall outlook for Australia’s banks from “stable” to “negative” in response to credit quality concerns emerging from the ongoing COVID-19 crisis.

Moody’s reiterated that it is expecting the economic impact of coronavirus-related disruptions to “strain banks” loan performance” and trigger a rise in defaults.

Following its decision to downgrade the aforementioned banks, Moody’s stated: “[The] rating actions are prompted by this change in outlook on the broader banking system.

“As a result of weakening economic activity and rising unemployment, Moody’s expects loan defaults to increase, although the ultimate impact will depend on the breadth and severity of the disruption as well as on the effectiveness of the large stimulus measures provided by the Australian government to support domestic companies and consumption.”

Moody’s also noted that an increase in credit loss provisioning, record-low interest rates and “strong price competition” amid “low loan growth” would also dent bank profitability.

Therefore, Moody’s said it expects lenders, particularly smaller banks, to struggle to generate adequate capital buffers against loan losses, despite funding support from both the Reserve Bank of Australia and the federal government.

MyState Bank issued a statement in response to Moody’s decision, reassuring shareholders that the bank remains well capitalised.

“MyState Bank remains compliant with its key regulatory capital and liquidity ratios and has prudently managed these ratios at appropriate levels as the COVID-19 pandemic developed,” MyState managing director and CEO Melos Sulicich said.

“We will continue to focus on maintaining a strong bank and providing support for our customers as the nation manages its way through these extraordinary times.”

Moody’s announcement comes as several banks, non-banks and mortgage insurance providers tighten their serviceability criteria for new lending in response to growing credit quality concerns arising from the COVID-19 crisis.  

[Related: Mortgage default rate of 10% not improbable but ‘unlikely’]

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