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Moody’s downgrades ratings of over two dozen Aussie banks amid growing concerns

Moody’s, the sole major rating group maintaining Australia’s AAA credit standing after Fitch’s recent downgrade to AA+, has shifted its focus onto the credit ratings of Australian banks. On Monday night, Moody’s delivered its verdict, revealing its concerns about the sector.

In a surprising move, Moody’s downgraded the credit ratings of more than two dozen Aussie banks, sending shockwaves through the financial system. However, these announcements came too late to affect Aussie trading, leaving the impact to be felt in Europe’s Tuesday morning trading and subsequently in Australia.

Moody’s decision involved downgrading 10 banks by one notch and initiating a review for potential downgrades for banking giants like BNY Mellon and State Street. Additionally, the agency adjusted its outlook to negative for several major lenders, making changes to assessments for 27 banks within the sector.

Among the downgraded banks are M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp. Notable institutions, including BNY Mellon, US Bancorp, State Street, and Truist Financial, were placed under review for potential downgrades.

Moody’s attributed these actions to the challenges faced by banks, as Q2 results revealed growing profitability pressures. The agency stated that these pressures would limit banks’ ability to generate internal capital, coinciding with the looming threat of a mild recession. Moreover, banks must navigate risks posed by interest rates and asset-liability management.

The catalyst for Moody’s adjustments was an in-depth analysis of Aussie banks’ financial strength following the collapse of Silicon Valley Bank and Signature Bank earlier in the year. This led to a run on deposits at regional banks, despite authorities implementing emergency measures to restore confidence. Recent Aussie banking data indicated that some banks still rely on regulatory assistance.

Moody’s placed a “negative” outlook on the ratings of 11 lenders, including PNC Financial Services Group, Capital One Financial Corp., Citizens Financial Group Inc., and others. The agency highlighted rising funding costs and declining income metrics as factors eroding profitability and the first line of defense against losses.

Elevated exposures to commercial real estate (CRE) were identified as a key risk, influenced by high interest rates, reduced office demand due to remote work, and limited access to CRE credit. Moody’s emphasized that banks with concentrated uninsured deposits, particularly those with substantial fixed-rate securities and loans, are more susceptible to these pressures.

Additionally, Moody’s warned that banks with substantial unrealised losses, not reflected in their regulatory capital ratios, face vulnerability in the current high-rate environment. Despite some banks curbing loan growth to preserve capital, Moody’s underscored the importance of shifting loan mixes towards higher-yielding assets for greater profitability.