Moody's downgrades Australia's top banks

Shares in Australia's big four banks have fallen after Moody's cut their long-term credit ratings due to risks associated with the local housing market.

Moody's stripped the big four banks - the Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (ASB in New Zealand), National Australia Bank (BNZ in New Zealand), and Westpac Banking Corporation (Westpac) - of their Aa2 long-term rating and placed them on the next level down at Aa3, although it did not alter their short-term ratings.

The ratings downgrade has focused attention on the risks lurking in the country's A$1.51 trillion (US$1.15 trillion) of mortgage loans.

Ratings agency Moody's last night fired a warning shot across the bows of the housing-dependent Australian economy, downgrading the big banks.

Moody's cited high levels of debt and rapid credit expansion in the context of nominal wage growth had forced its hand, increasing the sensitivity of household expenditure and therefore the banking sector's exposure to a potential shock.

Australia's largest banks have been dealt a serious double blow. "That's a big driver of it", he said.

He said the banks should have some slack to absorb an increase in funding costs because swap rates had fallen about 30bps over the past four to five months, but advertised loan rates had not fallen.

Moody's also downgraded the New Zealand subsidiaries of the Australian banks in line with their parents.

Over 60 per cent of the Australian banking system's loan book is in residential property, almost 20 percentage points more than second-placed Norway and more than double the USA ratio, according to data from the International Monetary Fund.

Bendigo and Adelaide Bank, Heritage Bank, ME Bank, Newcastle Permanent Building Society, QT Mutual Bank, Teachers Mutual, Victoria Teachers Mutual, and Credit Union Australia Limited were also downgraded.