At first glance, international ratings agency Moody’s Investors Service announcement it may cut the credit ratings of the four major Australasian banks appears a heavy blow.
Ratings downgrades usually raise banks’ borrowing costs and lead to their customers having to pay more for their loans.
However, if Moody’s does downgrade – and putting organisations on negative watch suggests only a 33% chance of a downgrade – it will only bring its ratings in line with those of rival ratings agency Standard & Poor’s.
Moody’s currently rates the four big Australian banks “Aa1” while S&P rates them “AA” with a stable outlook. S&P’s “AA” is the equivalent of Moody’s “Aa2” rating. The third major ratings agency Fitch’s ratings of the banks is in line with S&P’s.
Credit Suisse analysts says Moody’s is likely to either downgrade all four major banks or none of them.
“A downgrade is unlikely to affect earnings by more than 1%. While not a positive this is not a major setback for the banks,” they says.
Moody’s move is a response to the heavy dependence of the Australasian banks on wholesale funding – it calculates it averages 43% of total liabilities.
While the Australasian banks proved among the strongest during the global financial crisis (GFC), Moody’s says markets can tighten during times of uncertainty.
“The GFC has underlined the speed with which shifts in investor confidence can impact bank funding,” said Peter Winsbury, Moody’s senior vice president, in announcing the review.
However, the Australasian banks have been working on the problem for some time.
“Since the onset of the GFC in 2007 we have increased our stable funding by increasing customer deposits and long-term wholesale debt and reducing our use of short-term wholesale funding,” said Lyn Cobley, group treasurer at Commonwealth Bank of Australia which owns ASB Bank and which is the largest of the Australasian banks.
CBA has also significantly increased its holdings of liquid assets.
ANZ Bank’s group treasurer Rick Moscati said his bank understands the rationale for the review. ANZ/National Bank is New Zealand’s largest bank.
“We have also been working hard to reduce our reliance on wholesale funding which now accounts for about one-third of ANZ’s funding mix.” As well, short-dated offshore wholesale debt now accounts for less than 2%
of ANZ’s funding requirements, Moscati said.