After being downgraded by credit ratings agency Moody’s Investor Services last week, the major Australia banks may find themselves the target of short selling by global hedge fund managers.
Influential analyst Charlie Aitken of Southern Cross Equities said “While just about everyone, including the banks themselves, dismissed Moody’s downgrade, I would suggest it is significant and may well trigger global hedge funds shorting the big four banks, particularly now that all but NAB are ex-dividend.”
Last week Moody’s downgraded the long term senior unsecured debt of the big four Australian lenders from Aa1 to Aa2 on concerns by the ratings agency of the lenders dependence on wholesale funding markets.
As the Australian economy becomes increasingly skewed around the commodity boom that have produced favourable terms of trade and high asset prices “there is a potential for confidence shocks to impact the banks’ access to funding”, Moody’s said.
Of the major lenders, according to Mr. Aitken Westpac was most vulnerable.
“My gut feel is the stock the hedge funds will target from the short side is Westpac, with the highest percentage of domestic earnings and the highest exposure to east coast Australian property, small and medium enterprises and households,” he wrote. Westpac also had the highest wholesale funding requirements, he said.
Despite the warning, many analysts remain unperturbed by the downgrade. In a note to clients Macquarie said that the big four banks were amongst the highest rated lenders in the world in spite of a downgrade by the credit ratings agency.
“In addition, given that asset growth is largely being funded by deposit growth now (which is likely to be the case in the future), the downgrade would seem a moot point anyway,” the analysts said.
“We believe this is likely to seal the low asset growth outlook for the sector as the banks steadily move to lower loan-to-deposit ratios and a more balanced funding structure.” NAB appeared most exposed to issues highlighted by Moody’s, it said.