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Moody's downgrade of Australian banks won't raise funding costs - analysts

Jun 20, 2017

A credit ratings downgrade of Australia's biggest banks by Moody's Investor Service is not expected to raise their funding costs because the new rating is in line with other ratings agencies, banking analysts said.

Moody's on Monday downgraded the four largest Australian banks to a long-term credit rating of Aa3 from Aa2, citing risks from high household debt levels after sharp property price rises.

The new rating is in line with the long-term AA- credit rating that Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group Ltd and National Australia Bank Ltd have from Standard & Poor's and Fitch Ratings.

"Given this downgrade merely brings the major banks' credit ratings under Moody's to the equivalent notches under S&P and Fitch, we expect no impact on funding costs," Deutsche Bank analysts said in a note to clients published on Monday. However, the analysts said there was still a risk that S&P would downgrade the major banks due to a sovereign ratings downgrade or a reduction in government support, which could lift long-term funding costs by around 10 basis points.

S&P revised its outlook on the major banks to negative last July but it did not downgrade them when it lowered ratings on 23 smaller lenders in May based on expectations the government would support the big banks if needed.

Bell Potter analyst TS Lim said the government's introduction of a new 6 basis points tax on certain liabilities to help return the budget to a surplus made it appear even more likely that the banks would be bailed out in the event of a crisis.

"Given that, the ratings look pretty safe for the time being," he said.

Both houses of Australian parliament on Monday voted in favour of a tax on four biggest banks and Macquarie Group Ltd designed to raise $4.6 billion (3.61 billion pounds) over the first four years.

The banks have criticised the tax as unfair and argued that foreign rivals should be included to level the playing field. A Senate committee on Monday recommended the bank tax should be reviewed in two years and possibly waived in times of financial distress, but Treasurer Scott Morrison on Tuesday rejected those arguments.

"There's no need to do any of those things," he told the Australian Broadcasting Corp. Moody's also downgraded the New Zealand subsidiaries of the Australian banks in line with their parents. The banks have acknowledged the ratings downgrade but have not commented any further. Bank shares opened flat on Tuesday in line with the broader market.


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