Moody’s Cuts Ratings For Major Banks Citing Rising Household Debt

Ratings agency Moody's has slashed its rating for several Australian banks including four major banks in the country, sounding an alarm at the rising level of household debt in the economy.

The four major banks in Australia which are the Commonwealth Bank of Australia (CBA), the Australia and New Zealand Banking Group (ANZ), Westpac Banking Corporation (Westpac) and National Australia Bank (NAB) have seen their long term rating go from Aa2 down to the next level of Aa3.

Their short term rating was however retained and their ratings outlook indicated as stable. Other smaller banks that were also downgraded include Bendigo and Adelaide Bank, Credit Union Australia Limited and Members Equity Bank Limited.

In a statement Moody’s said

In Moody's assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness

According to the ratings firm, household debt is rising against the backdrop of low wage growth and fundamental changes to the labor market which was resulting in underemployment. It stated that factors like falling savings rate, rising household leverage and sharp growth recorded in interest-only and investment loans were signs of heightened risk.

Moody’s pointed out that the ratio of household debt to disposable income in the country was at 188.7 percent at the end of 2016, stats that are amongst the highest in the world. Residential mortgages form over 60 percent of the loan portfolio of Australian banks. Banks have recently taken steps to tighten lending norms in a bid to boost stability. The robustness of household balance sheets and bank portfolios are yet to be tested against a serious economic slump.

Moody’s move comes in the wake of another ratings firm Standard & Poor'sdowngrading ratings of several smaller banks in the country although it left the headline ratings of the bigger banks untouched. S&P however did slash their underlying ratings. Moody’s has also cut the underlying ratings but because it hasn’t given weightage to government assurances regarding the debt, the headline ratings have also fallen.

Analysts noted that the ratings downgrade would have no impact on the country’s sovereign rating. Omkar Joshi senior analyst with investment firm Regal Funds Management stated the downgrade may cause a marginal jump in the banks’ lending costs.