Banks take one-two punch

Australia’s leading banks have been hit with a double-whammy, with the Senate passing the Major Bank Levy, and Moody’s downgrading their credit ratings.

The controversial levy was passed in the House of Representatives yesterday, despite impassioned protests from the affected banks. The levy then passed through the Senate on Monday evening to become legislation.

While Australia’s Big Four banks (plus Macquarie Bank) start calculating how to handle the new levy as of 1 July 2017, they and several other Australian banks (minus Macquarie Bank) have been hit with a new problem – a credit downgrade from Moody’s.

The investors service reportedly made its decision based on the high level of risk that comes with the high levels of debt currently being shouldered by Australian households.

Which banks were downgraded?

Banks on the receiving end of the credit downgrade include:

On top of this, Moody’s downgraded Australia’s Macro Profile from “Very Strong-“ to “Strong+”.

This follows Standard and Poor’s reducing the credit ratings of 23 Australian lenders in May 2017, citing similar concerns around the risk of a housing market crash. Unlike the recent Moody’s downgrade, the Standard & Poor’s downgrade did not include the Big Four.

Why were these banks downgraded?

According to Moody’s, these credit downgrades are due to high and increasing levels of risk in the Australian economy, with factors contributing factors including:

• high levels of household indebtedness
• increasing prevalence of interest-only and investment home loans
• low wage growth
• rising underemployment

While APRA regulations are doing their part to manage Australia’s level of risk in the banking sector, Moody’s considers the nation to be sailing uncharted waters on a sea of risk, with unknown consequences should the worst happen:

“While Moody’s does not anticipate a sharp housing downturn as a 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.”

“The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness.”

What does this mean for Australia?

It’s possible that the banks being hit with a credit rating downgrade may find it more difficult to source wholesale funding for their financial activities, which could be a contributing factor to future interest rate rises.

This news comes is on top of concerns that the cost of the Major Bank Levy could also make an impact on Australia’s interest rates, bank fees, share dividends, or all of the above.

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