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.
Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. were all downgraded to Aa3 from Aa2, Bloomberg reports, citing a statement from Moody’s released on Monday.
The ratings outlook for all four lenders is stable, Moody’s said.
“Risks associated with the housing market have risen sharply in recent years,” Moody’s said in the statement.
While a sharp housing downturn isn’t its 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 statement said.
The ratings downgrade has focused attention on the risks lurking in the country’s A$1.51 trillion (US$1.15 trillion) of mortgage loans.
Last month S&P Global Ratings also downgraded the credit ratings of almost all of Australia’s financial institutions on similar concerns about the risks of a property market downturn.
However, it spared the four biggest banks on the expectation of government support in the event of a crisis.
Over 60 percent of the Australian banking system’s loan book is in residential property, nearly 20 percentage points more than second-placed Norway and more than double the ratio in the United States, Bloomberg said, citing data from the International Monetary Fund.
In Hong Kong, the ratio stands at only 14 percent.
The exposure to housing reflects the lack of other lending opportunities for Australian banks, and the large profits they have made from home loans, according to TS Lim, head of research at Bell Potter Securities Ltd.
Meanwhile, half of Australia’s mortgage credit is held by households who have borrowed more than six times their annual income, according to research by JCP Investment Partners, an equities fund.
In the UK, banks are only allowed to issue 15 percent of new mortgages at more than 4.5 times borrowers’ income.
Household debt is already at 189 percent of annual household income – one of the highest levels in the world.
The Reserve Bank of Australia recently estimated that one-third of borrowers have little or no buffer in the form of money set aside to meet an unexpected rise in mortgage loan repayments or other costs, Bloomberg said.
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