Aussie banks will remain strong: Moody's

The major Australian banks are likely to retain their strong credit profiles despite the "deteriorating operating environment" and upward revisions to capital risk weights, says Moody's Investors Service.

In a new report on the banks, the global ratings agency said the risk-weighted capital metrics of the big four will come under “downward pressure” due to cyclical and regulatory factors, but the impact on their credit profiles will be “limited”.

All four major banks have Aa2 ratings with Moody’s (‘high quality’), as well as AA- ratings with Fitch and Standard & Poor’s (‘very strong’).

“The banks’ capital levels are facing headwinds arising from a deteriorating operating environment, lower capital generation as earnings growth slows, further regulatory reform and likely upward revisions to capital risk weights,” the report said.

“Nonetheless, the banks retain considerable flexibility to preserve their strong credit profiles; their profitability levels remain strong and dividend reinvestment programs support their ability to raise additional capital,” Moody’s said.

The Common Equity Tier 1 (CET1) ratios of the banks will be revised upwards and residential mortgage risk weights will rise to an average of at least 25 per cent by July 2016, Moody’s said.

“Our sensitivity analysis nonetheless suggests that the potential decline in the banks’ capital metrics as a result of changes to risk weights will be limited.

“Even in a highly stressed scenario, and before factoring in any potential for organic capital generation, the major banks’ CET1 ratios will remain above 8 per cent, a level which is the combination of the regulatory minimum CET1 plus Capital Conservation and Domestic Systemically Important Bank (D-SIB) buffers.”

Notwithstanding the downward pressure from higher credit risk weighted assets, the impact of weaker asset quality on risk-weighted capital ratios is likely to be spread over multiple reporting periods, Moody’s said.

“Given the banks’ strong profitability and potential to raise additional capital via their dividend reinvestment programs, we continue to view Australia’s major banks as retaining considerable flexibility to maintain their strong capital profiles.”

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