Moody's cuts ratings on Australia's banks on housing concern

[SYDNEY] Moody's Investors Service 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, Moody's said in a statement released Monday.

"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," Moody's said.

The Australian dollar fell as much as 0.5 per cent following the announcement, and was trading at 76.02 US cents at 6:37pm Sydney time.

S&P Global Ratings last month 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.

Residential mortgages account for more than 60 per cent of the Australian banks' loan books. The banks have recently tightened lending standards under pressure from regulators. The combination of soaring house prices and stagnant wage growth has pushed the ratio of household debt to disposable income to 189 per cent - one of the highest levels in the world.

"The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private sector indebtedness," Moody's said in the statement.

BLOOMBERG