As published on businesstimes.com.sg, Thursday 2 April, 2020.
[BENGALURU] Ratings agency Moody's downgraded its outlook for Australia's banking system to 'negative' from 'stable' on Thursday, as the coronavirus is expected to hit profitability via increasing provisions for loan losses and record low interest rates.
Moody's said the banks' strong capital positioning and asset quality would help ward off credit losses for now, but prolonged economic disruptions could erode capital levels and lead to more impairments of home loans.
Australia's 'Big Four' banks generate a majority of their earnings through home loans and have been struggling as a series of rate cuts to record lows have put intense pressure on margins.
While profitability is likely to be squeezed, Moody's said, large stimulus measures from the Australian government to support companies and boost consumption may help mitigate risks of loan defaults.
Unlike the 2008 financial crisis, Australia's banks find themselves in a much stronger capital position because they have built up buffers to meet the regulator's 10.5 per cent target.
Last month, the country's prudential regulator also loosened its capital requirements to enable banks to lend more freely and boost credit flow to the economy.
In a bid to counter the economic impact of the virus outbreak, the Reserve Bank of Australia reduced its cash rate to an all-time low of 0.25 per cent in March and said the board would not tighten policy until it achieves its employment and inflation goals.
Ratings agency S&P provided a similar warning on Wednesday, saying that a severe downturn could trigger downgrades for banks due to a sharp fall in property prices and a materially weaker economic outlook.
Meanwhile, Moody's also downgraded its outlook for New Zealand's banking system to 'negative' from 'stable' along similar lines, saying that weaker economic growth this year could lead to an increase in non-performing loans.