Moody’s reviews Australia’s top four banks

By Peter Smith in Sydney

Published: February 16 2011 23:04 | Last updated: February 17 2011 01:22

Australia’s top four retail banks – which have commanded the highest credit rating in the global banking system – have been placed under review for “possible downgrade” by Moody’s Investors Service, the rating agency.

“The review will focus on the Australian banking system’s structural sensitivity to conditions in the [international] wholesale funding market,” said Patrick Winsbury, Moody’s Sydney-based vice president. “The global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding, warranting a review.”

The four – ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac – rely on market funds for an average 43 per cent of their total liabilities.

That is a higher percentage than for many banks around the world but the funds are needed by the Australian banks to address a funding shortfall from customer deposit bases.

For two years, Moody’s has had a negative outlook on the Australian quartet’s long-term debt, which is rated Aa1, and a decision on whether to downgrade any or all of the Australian banks is expected within three months.

Moody’s has had a negative outlook on at least three of the four big banks since March 2009 and the review announced on Wednesday is designed to reaffirm the negative outlook, prompt a downgrade or move them to a stable outlook. The review is designed to firm up the agency’s view of whether the banks should remain on negative outlook or be downgraded.

However, Moody’s said that systemic support for the Australian banks remained strong and highlighted the dominant positions in Australia’s financial system.

“Consequently, Moody’s anticipates that after the conclusion of the review, their long-term, senior unsecured debt ratings – which incorporate the prospect of systemic support – will remain within the Aa category,” the agency said.

CBA, the largest of the four based on market value, this month reported a 5 per cent rise in profits after tax to A$3bn for the six months ended December. At the end of 2010, it had a tier one capital ratio of 9.71 per cent, 56 basis points higher than on June 30. It had said that customer deposits made up of 60 per cent of its total funding source compared with 56 per cent in the same period a year before.

Rick Moscati, ANZ treasurer, said he understood the rationale for Moody’s review.

“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. We have also increased the average tenor of our wholesale funding and short-dated wholesale debt now accounts for less than two per cent of our Australian funding requirements,” he added.

Commonwealth Bank said it was not expecting any material impact on its funding plans as a result of the Moody’s review.

Moody’s said the banks had diversified their investor bases which could support their ability to issue covered bonds, an alternative funding source.

“During the crisis, the banks also demonstrated an ability to tap Australia’s pool of superannuation savings whilst tighter funding conditions prevailed offshore,” it said.

The rating agency said in many respects Australia’s banks exhibited “strong credit characteristics”.

“The banks’ franchises have been enhanced – and their pricing power maintained – by market consolidation and by the exit of price-led, securitisation-funded competitors,” Moody’s said.