Sydney, February 18, 2009 -- Moody's Investors Service commented that it is to reassess Australian bank ratings in light of the deteriorating economic outlook.
The Australian banking system remains one of the highest-rated in Moody's coverage, with the four major banks carrying Bank Financial Strength ratings of B and deposit and debt ratings of Aa1.
Moody's had previously provided guidance that Australian bank ratings were likely to remain stable if economic growth remained within the 1% range and unemployment below 7%.
As the outlook for the Australian economy continues to weaken, these metrics may well be breached. Moody's Economy.com has updated its economic forecasts for Australia, foreseeing a -0.4% contraction in GDP growth for 2009, and unemployment peaking at 7.2% in the third quarter of 2010.
Moody's will consider the potential impact on asset quality and earnings -- and how this may affect Australian bank financial strength ratings.
At the same time, Moody's notes some significant, offsetting positive developments that will be considered, including:
• Increased capital levels: Australian bank Tier 1 ratios now compare better to their international peers than pre-crisis, if adjusted for calculation differences between jurisdictions
• Lengthened funding profiles, significantly bolstered by the issuance of government-guaranteed debt
• Improved franchise positions as a result of market consolidation and the exit of price-led competitors: this has allowed for stronger asset product spreads, only partially offset by weaker liability product spreads
Moody's debt and deposit ratings incorporate the potential for systemic support. The Australian government has demonstrated strong commitment to supporting the financial system with its debt and deposit guarantee scheme and the AOFM is supporting mortgage originations through its purchases of RMBS. The central bank has also broadened its repo facilities to underpin system liquidity.
The Australian government's financial flexibility to support the financial system if required, and to stimulate the economy, is strong, as highlighted in Moody's recent report "How far can Aaa governments stretch their balance sheets?"
Accordingly, the potential for systemic support is likely to continue to provide a strong underpinning to Australian bank deposit and debt ratings.
Moody's expects to provide a more detailed update by early March.