Moody's downgrades Australia's top banks over housing risk

Alain Brian
Juin 19, 2017

Moody's Investors Service cut the long-term credit rating of Australia's four biggest banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders.

Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. were all downgraded to Aa3 from Aa2, Moody's said in a statement released Monday.

S&P Global Ratings last month downgraded the credit ratings of nearly all of Australia's financial institutions on similar concerns about the risks of a property market downturn. While a sharp housing downturn isn't its core scenario, "the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks", Moody's said.

With cash interest rates at a record low and house prices near record highs, the nation's household debt-to-income ratio has climbed to an all-time peak of 189 percent, according to the Reserve Bank of Australia (RBA).

"Whilst unemployment remains low - at 5.5 per cent as at May 2017 - rising levels of underemployment indicate spare capacity within the labor market, which could constrain wage growth over the medium term".

"In Moody's view, elevated risks within the household sector heighten the sensitivity of Australian banks' credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years", the investor group said in a statement.

Moody's noted that the banks were taking steps to strengthen their balance sheets but "the very high level of household sector indebtedness will take a considerable period of time to unwind".

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