Big banks hit with levy and downgrade

Last month S&P Global Ratings also downgraded the credit ratings of nearly all of Australia's financial institutions on similar concerns about the risks of a property market downturn.

Moody's stripped the big four banks - the Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (ASB in New Zealand), National Australia Bank (BNZ in New Zealand), and Westpac Banking Corporation (Westpac) - of their Aa2 long-term rating and placed them on the next level down at Aa3, although it did not alter their short-term ratings.

Moody's Investors Service has 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.

Moody's action comes a month after rival agency S&P Global downgraded nearly all Australian banks over fears of "a sharp correction in property prices".

However, it spared the four biggest banks on the expectation of government support in the event of a crisis.

Massey University banking expert David Tripe said the downgrades could put about 10 basis points of upward pressure on New Zealand lending rates.

According to Bloomberg, more than 60 per cent of the loans made by Australian banks are for residential property, compared to less than 40 per cent in Canada, the USA and Britain.

In its statement to the exchange on Tuesday morning it pointed out that Moody's was not expecting a sharp downturn in housing as a "core scenario" but rather a "tail risk".

Moody's said elevated risks within the household sector heighten the sensitivity of Australian banks' credit profiles to an adverse shock.

It's a problem well illustrated by a recent chart from the Reserve Bank of Australia, which showed housing prices are more than five times household income, and household debt well above 150 per cent of household income.

The downgrade suggests bank funding will be slightly more expensive when raising money overseas, a factor that has forced higher independent interest rate increases in the past.

  • Zachary Reyes