Australia's big banks suffer credit downgrades
Moody's credit rating agency has warned Australia's large banks that they may have their high ratings downgraded as prolonged low interest rates in the country continue to put pressure on the banks' credit profiles. The report also suggested that low wages and high housing prices throughout Australia are raising the tail risks for banks with an increase in household debt and overall credit-to-GDP ratios. Last week, National Australia Bank, Westpac, ANZ and Commonwealth Bank had their ratings downgraded by Standard & Poor's to AA- with a negative outlook. 

Australia's banks are in the firing line of credit rating agency Moody's a week after rival agency Standard & Poor's revised the outlook of the major lenders to negative.

A weak operating environment and the impact of persistently low interest rates on profit margins will "put pressure on the credit profiles of the major banks, particularly in the context of their very high ratings," Moody's senior analyst Frank Mirenzi said in a downbeat report published by the agency on Thursday.

The report said that the banks will be challenged to preserve their net interest margins in a period of prolonged low interest rates, particularly if the Reserve Bank lowers the cash rate from its current rate of 1.75 per cent.

There are several ways to work out whether the banks are cheap or expensive. James Davies

This was partly because new regulation would increase competition for retail deposits, driving up funding costs at a time when competition for home loans is set to intensify.

"The need to meet the requirements of the Net Stable Funding Ratio is likely to increase price competition for retail deposits. If, at the same time, tighter housing loan underwriting criteria increase price competition for lower-risk loans, then bank margins may be squeezed and become increasingly sensitive to volatility in wholesale market funding costs," the report said.