Moody’s Outlook For Australian Banking Downgraded To Negative

Post by Sharat on June 24, 2009 · Under Australian Economy, Business News, Capital Markets, banking · Comment

Credit ratings agency Moody’s investor service has shifted its position on the outlook for Australian banks, downgrading the entire Australian banking sector, as an increase in bad debt and declining consumer demand hurts the ability of Australian banks ability to generate profits.

Stopping short of downgrading Australian banks credit rating, the ratings agency has changed its outlook for the Australian banking sector from “stable” to “negative”.

Moody’s said that future operating conditions for the Big Four Australian banks could be difficult despite those banks being extremely profitable and stronger than global peers.

The change in Moody’s outlook came on the back of a downgrade by a Macquarie banking analyst of both Westpac and Commonwealth Bank of Australia, that nation’s two largest banks. Macquarie cited a likelihood of rising consumer defaults as unemployment increases and a dramatic drop in business investment.

Moody’s spokesperson Jerry Chien said that Australian bank lending volumes have recessed as the effects of the slowdown in the Australian economy began to proliferate.

“The slowdowns are clearly making themselves felt on the performances of banks in Australia,” he said. “While funding costs have risen as a result of the crisis and competition for deposits is high, pre-provision bank margins are improving as the banks are able to better price for risk.

“Australian banks corporate exposures are skewed towards stronger companies, many of which raised capital, so single-name concentration risk is relatively high, creating some sensitivity to event risk.” Mr. Chien said.

Tom Quarmby, banking analyst for Macquarie said that the risks that threaten the profitability of the Big Four banks had increased, in particular CBA and Westpac. Mr. Quarmby retained his recommendations for both NAB and ANZ, which were neutral and buy respectively.

“Australian banks have demonstrated significant resilience, remaining structurally intact despite the challenges of the past two years. But new challenges are emerging, including weak domestic investment, rising interest rates and unemployment. Considering the full valuations, major bank stocks’ prospects are limited.” Mr Quarmby said.

The Macquarie analyst said that forecast revenue growth in 2009-2010 was just 4 per cent compared with the 15 per cent achieved in 2009, as rising bad debt and poor asset quality affected bottom lines. Mr. Quarmby expects that tier-one capital ratios, a closely watched measure of banks financial health, with fall from 8-9 per cent, to an average of just 7 per cent.

“In our opinion, the deleveraging has not finished. Domestic investment is likely to decline in the medium term. Unemployment and borrowing costs will continue to rise. Business and households will continue to repair balance sheets resulting in anaemic credit growth for the major banks and negative growth for the system in 2010.” Mr. Quarmby said.

In spite of the poor outlook for the sector in general, the Big Four banks have continued their dominance of the sector and increased market share according to data released by the Australian Prudential Regulation Authority (APRA).

The data from APRA shows that the Big Four have increased their market share at the expense of regional lenders, and international banks that have retreated from the Australian market.

The Big Four banks accounted for 80 per cent of net interest income, a key measure of profitability, which rose from $39.86 billion in 2007 to $46.42 billion in 2008. Fee income in 2008 was $20.9 billion with 71 per cent of that belonging to Big Four lenders.

The value of assets held by international bank subsidiaries and branches operating in Australia declined sharply. Total assets held with these lenders fell by over one third to $103.4 billion in the quarter ending December compared with t of $164.45 billion in the previous quarter.

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