Moody’s downgrade “non-event” for majors

by Miklos Bolza23 Jun 2017
An announcement by ratings agency Moody’s to downgrade 12 authorised deposit taking institutions is a “non-event” for the major banks, according to a leading investment firm.

In an investor note sent out on Tuesday (20 June), Morningstar said that the move was not surprising, given S&P’s downgrade a few weeks earlier.

However, Morningstar analysts disagreed with those at Moody’s about the reasoning behind the downgrade.

“Despite the ominous sounding justification by Moody’s, in our opinion, there is no material impact from the downgrade as Moody’s ratings now only align with S&P where equivalent ratings exist,” the firm’s analysts wrote.

Morningstar remains “cautiously optimistic” about the big four banks, stating that the banking oligopoly benefited from a range of factors including dominant market positions, large scale, strong loan quality and robust risk management.

Economic concerns around a housing crash were also overdone, Morningstar analysts said in agreement with Moody’s comments when it made the downgrades.

“But Moody’s justified the downgrades stating in its view ‘the credit conditions in Australia have deteriorated’. We have a different view to Moody’s and despite concerns of high household debt and low nominal wage growth increasing household leverage, we believe the major banks are well placed to manage the increased risks.”

Thus, the downgrade had no impact on Morningstar’s risk assessment of the big four banks with the analysts “encouraged” by regulatory initiatives into the finance industry.

However, the authors acknowledged there were still some looming risks to the Australian banking industry, in particular the big four.

“Key risks include the threat of a severe recession in Australia caused by a sharp economic slowdown in China; increased regulatory capital requirements including clarity around ‘unquestionably strong’; dislocation of international wholesale funding markets’ increased political risk – future increase in the bank levy; and a housing market crash absent a recession.”

Morningstar forecasts modest loan growth, modest net interest margin compression, higher bad debt expense and lower dividend payout ratios for the big four banks.

Finally, analysts expressed their disappointment with the bank levy, which they said could have far reaching consequences for investors, taxpayers and the government.

“The banks will obviously have to pay for it, with customers, staff and shareholders wearing the cost. We expect the bulk of the bank tax will be passed through to customers, particularly to home loan borrowers,” they wrote.

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