Housing risks won’t undermine the banks: Moody’s

Moody’s Investors Service announced this week that its stable outlook for Australian banks is underpinned by favourable domestic economic trends as well as the banks’ strengthening capital positions and stable profitability, which offset heightened risks from the housing market.

The ratings agency downgraded the banks’ ratings on 19 June 2017, on concerns over rising tail risks in the domestic housing sector.

“The banks’ lower ratings now adequately capture the balance of risks in the system,” Moody’s vice president and senior credit officer Frank Mirenzi said.

“With the operating environment, Moody’s says that the Australian economy will continue to perform well and Moody’s forecasts real GDP growth of 2.8 per cent in 2018, with the unemployment rate holding steady at 5.6 per cent over the period.

“While housing market-related risks remain high, such risks will not likely significantly undermine the stability of the banking system over the next 12–18 months.”

On asset quality and capitalisation, Moody’s says that the banks’ asset quality may worsen slightly, but their capitalisation will improve.

Mr Mirenzi said: “While asset quality remains very strong, levels of problem loans could begin to rise from cyclical lows. Consequently, system-wide asset quality could deteriorate modestly. Risks in the housing market, however, will not likely increase further due to regulatory measures to curb growth in riskier housing loans.”

Moody’s rates 21 authorised deposit-taking institutions in Australia, comprising 18 banks, two credit unions and one building society. The 18 banks accounted for 90 per cent of total gross loans and advances in the Australian banking system as of end of August 2017.