Moody's moves Australian banks' outlook to negative

A couple look over Sydney Harbour on a rainy day. (Photo by Don Arnold/Getty Images)

Moody’s has changed the outlook for the banking system in Australia to negative from stable.

The worry is declining profits from low interest rates, household debt from a booming housing market, increasing bad loans and the challenges of Australia’s ongoing economic transition.

Moody’s this month affirmed Australia’s triple-A sovereign credit rating. Standard and Poor’s last month placed Australia on credit watch negative from its previously stable outlook.

The Commonwealth Bank this month warned of more bad debts as it posted a 3% rise in full year cash profit to $9.45 billion, in line with most forecasts.

The latest outlook for the banking sector doesn’t change the Aa2 rating for the big four banks but it does put them on notice.

In response to Moody’s action, Commonwealth Bank CFO David Craig says the 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,” he says.

“Moody’s emphasis on profitability highlights the importance of profit growth in maintaining banks’ strength and the confidence of global funding providers. It is this strength and confidence which enable the bank to access and provide low cost funding for our customers.”

Frank Mirenzi, a Moody’s senior analyst, says the change reflects the agency’s expectation of a more challenging operating environment for the remainder of 2016 and beyond.

He says this could lead “a deterioration in their (banks) profit growth and asset quality, as well as an increase in their sensitivity to external shocks”.

Households, and the economy as a whole, are increasingly vulnerable to negative economic shocks, he says.

The ratings agency says lower commodity prices are likely to exert further pressure on a number of resources-related borrowers and regions.

While Australian banks’ direct exposure to the resources sector is low, they retain high second order risks.

Moody’s expects problem loans will continue to rise in resource industries as well as in the household sector of mining states and regions.

“The banks’ profitability will be challenged by a number of factors,” Mirenzi says.

“Low interest rates and strong lending competition, combined with pressure to re-price their deposit books, are likely to place pressure on net interest margins.

“Additionally, moderately rising credit costs — from historically low levels — will provide a further headwind to profit growth.

“Nevertheless, the banks remain highly profitable, supported by strong pricing power and high levels of operating efficiency.”

The statement also noted:

Australian banks maintain strong buffers in terms of capital and Moody’s points out that Australian banks have improved their capital positions in recent years, which has enhanced their resilience. While Moody’s expects further capital improvements over time, the timing of such improvements will depend on the global and domestic regulatory agenda. Moody’s views these regulatory initiatives as likely to be bondholder-friendly, however, their implementation remains beyond the 12 month horizon of the banking system outlook.

Moody’s rates 14 commercial banks and mutual banks in Australia and two foreign bank subsidiaries. Together, they account for 91% of total banking system loans.

On this week’s Business Insider ‘Devils and Details’ podcast, we chat with David Bassanese about the reporting season and the pressure on the banking sector. You can listen in here:

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