Commonwealth Bank, ANZ, National Australia Bank and Westpac shares drop after Moody's downgrade

People walk out of a Commonwealth Bank of Australia branch in Sydney, Australia, August 12, 2015. Reuters/David Gray

Shares in Commonwealth Bank, ANZ, National Australia Bank and Westpac have dropped, with Westpac suffering the worst fall with a 1.1 percent decline by 1020 AEST. The other major banks were down by between 0.5 and 0.9 percent.

The big four banks have opened lower after Moody's downgraded its credit ratings. The credit rating agency associated the move to high house prices in the core Sydney and Melbourne markets.

The banks were stripped of their Aa2 long-term rating. Moody's put them on the next level down at Aa3, while their short term ratings remain the same.

Australia’s four largest banks were among 12 institutions that had their long-term ratings cut. Moody's issued a statement on Monday, saying elevated risks within the household sector intensify the sensitivity of banks’ credit profiles despite developments in their capital and liquidity in the past years.

High house prices in Australia

"In Moody's assessment, risks associated with the housing market have risen sharply in recent years,” the statement reads, according to the Sydney Morning Herald. The agency cited an increasing latent risks in the housing market in previous years as significant house price appreciation in the core housing markets of Melbourne and Sydney resulted to high and mounting household indebtedness.

Moreover, it explained the growth in household indebtedness comes against the backdrop of low wage growth as well as structural changes in the labour market. The decision by the agency to downgrade the ratings of Commonwealth Bank, ANZ, National Australia Bank and Westpac focused attention on the risks that lurk in Australia’s $1.51 trillion of mortgage loans.

The agency did not anticipate a sharp housing slump as a core scenario. The risk represented by household sector indebtedness has been a consideration in the context of the high ratings assigned to Aussie banks.

Some smaller banks were also downgraded. These include Members Equity Bank Limited, Bendigo and Adelaide Bank and Credit Union Australia Limited. Heritage Bank, Newcastle Permanent Building Society, Victoria Teachers Mutual, Teachers Mutual, ME Bank and QT Mutual Bank were also affected.

In May, Standard and Poor's downgraded a huge range of Aussie lenders. By that time, the largest banks were not affected. Australian banks are now preparing for an announcement from the Australian Prudential Regulatory Authority, which is due to confirm whether they will be required to hold more capital against their mortgage books as part of a more comprehensive update on capital requirements.

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