Advisers with clients whose portfolios are overweight banking stocks should take note: Fitch Ratings has downgraded its outlook for the banking sector to negative. This is due to concerns about macroeconomic risks and profit growth.
This first major ratings announcement for 2017 comes on the back of broad-based decisions by ratings agencies to leave Australia’s rating unchanged at the end of 2016.
Late last year, Standard & Poor’s kept its AAA rating for Australia, albeit on a negative watch. Fitch also reaffirmed its AAA rating and Moody’s left its Aaa ‘stable’ rating unchanged.
Marie Diron, associate managing director, sovereign rating group, Moody’s Investors Service, doesn’t expect any change to the rating in the immediate future.
“While we do see some vulnerabilities, there is shock absorption capacity in the economy … to face more tense times,” Diron says.
Heightened activity in the housing market and the relatively high levels of household debt may pose some risks.
“If house prices were to fall significantly, then households would prioritise mortgage payments and would cut some other consumption,” Diron explains. “That could have implications for the banking sector, but our assessment is the banking sector is relatively strong.”
She says the economy could absorb a period of lower growth, thanks to vigilant monetary policy and robust regulation of the banking sector. However, Moody’s also says reliance on international capital is one potential weakness to watch.
“Australia is dependent on external financing, so its government [and bank] debt is partly owned by foreign investors,” Diron says. “That’s a reflection of the strength of these Australian assets. But it could turn into a weakness when investors are reassessing the value and the risks of investing in Australian or other assets. Foreign investors can change this assessment more quickly than domestic investors.”
Nevertheless, there are few clouds on Moody’s horizon that should threaten Australia’s AAA rating. “We think Australia has the economic and institutional features to support exceptional shock absorption capacity,” she says.
Diana Mousina, economist, multi-asset group, AMP Capital, commented on the longevity of Australia’s decade-old AAA rating, reminding clients in a note that the Australian economy is in good shape.
“The central bank has room to ease monetary policy further, the financial system is in a good condition and public finances are under control, despite the fiscal slippage in the budget over the past five to six years,” Mousina says.
“Government net debt, which is total financial liabilities minus financial assets, has been on the rise since the budget was hit after the GFC,” she explains. “But net debt levels are low on a global comparison, with current net debt at 18 per cent of GDP, compared [with the average in advanced economies of about] 70 per cent.”
Nevertheless, because of Australia’s high external debt, the government needs to keep spending in check.
Mousina says: “Ratings agencies need to be confident the fiscal consolidation path looks credible and manageable.”
