Moody’s big-bank downgrades surprise analysts, but shareholders not fussed

Shareholders have brushed off a decision by a key ratings agency to downgrade the debt ratings of Australia’s big-four banks, with investors comforted by the banks’ relative outperformance and the steady stream of record profits.

Yesterday, Moody’s sliced to Aa2 from Aa1 the long-term, senior unsecured debt ratings of ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp, citing their reliance on offshore funding.

”The downgrade reflects our view of the Australian banking system’s structural sensitivity to conditions in wholesale funding markets,” Moody’s senior vice-president Patrick Winsbury said.

”The global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding,” Windsbury said.

”While the major banks have reduced their sensitivity to disruptions in the wholesale funding markets, the Australian financial sector’s long-term, underlying reliance on offshore debt remains in place.”

While the announcement may be a blow, an ‘AA’ rating is high by international standards and is higher than some sovereign ratings. The banks have a stable outlook.

And this morning, shares in the big-four banks were all higher, suggesting few investors were alarmed by the announcement.

Paul Dowling, principal analyst at banking research and advisory firm East & Partners, has described the announcement as a surprise.

“The banks have been successful in replacing offshore funding with deposits, but clearly not fast enough for Moody’s,” Dowling says.

“The banks have recognised the risk of being so dependent on the offshore market, and for the past 18 months have been engaged in a deposit war,” Dowling says.

He says the banks have managed to flip its funding sources since the GFC to now derive most of its funding from deposits, thereby reducing its reliance on the offshore markets which froze during the crisis.

And while Dowling says the views of the ratings agency continues to get some attention (despite the hit to their reputation for failing to tip the GFC), the downgrade is unlikely to present credit-access problems for SMEs, because credit demand from SMEs has diminished.

After the announcement, CommBank group treasurer Lyn Cobley said the bank had diversified its investor base and increased the weighted average tenor of both short-term and long-term wholesale debt and significantly increased holdings of liquid assets.

“At this point we do not expect this to have any material impact on our funding plans or expected pricing of our new issuance,” Cobley said.

NAB said it remains committed to maintaining its strong capital, funding and liquidity position.