Big bank oligopoly ‘pricing power’ will prevail

In a research note released late on Tuesday, Morningstar analyst David Ellis said there is “no material impact” from the downgrade as Moody’s ratings now align with S&P – which downgraded 23 lenders last month – where equivalent ratings exist.

“Wholesale funding markets had already priced in the S&P rating and Australian major bank credit default swap spreads barely moved overnight,” Mr Ellis said.

“Despite the downgrade, we remain cautiously optimistic on the outlook for the major banks. We believe the banking oligopoly benefits from dominant market positions, large scale, strong loan quality, robust risk management, and most importantly, sufficient pricing power to enable partial or full recovery of increased costs,” he said.

On Monday, Moody’s Investors Service said that increased risks in Australia's household sector will "heighten the sensitivity of the banks' credit profiles to an adverse shock".

The long-term ratings of the four major Australian banks have been downgraded to Aa3 from Aa2.

The ratings agency cited “elevated risks in the household sector” and stated that “credit conditions in Australia have deteriorated”.

Morningstar disagrees: “We have a different view to Moody’s and despite concerns of high household debt and low nominal wage growth increasing household leverage, we believe the major banks are well placed to manage the increased risks,” Mr Ellis said.

The “oligopoly” and “pricing power” of the majors – which Morningstar believes will help them mitigate increased costs – has become a target for the federal government.

The House of Representatives economics committee’s ‘Review of the Four Major Banks’, commissioned by the government last year, concluded that Australia’s banking sector is an oligopoly and that Australia’s largest banks have significant pricing power which they have used to the detriment of everyday Australians.

Last month, treasurer Scott Morrison warned that “this is not a situation that the government is willing to accept.”

The Treasurer announced on budget night that the ACCC has been directed to undertake an inquiry into residential mortgage pricing.

“The ACCC will be able to use its information-gathering powers to obtain and scrutinise documents from any bank affected by the levy and to report publicly on its findings,” Mr Morrison said.

“The ACCC inquiry will illuminate how the banks respond to the introduction of the levy and give all Australians the information they need to get a better deal elsewhere from any of the more than 100 other banks, credit unions and building societies, as well as other non-bank competitors,” he said.

[Related: ACCC could steer borrowers away from the big four]