Australia’s biggest banks haven’t had a happy time of it lately -- from cuts to their credit ratings, Prime Minister Malcolm Turnbull’s A$6.2 billion ($4.7 billion) levy, and the prospect regulators will force lenders to hold more capital against their mortgage books.

When talking about “the banks” Down Under, we mean the big four: Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. They hold about 80 percent of the country’s mortgages, arrange more than half of all bond sales and syndicated loans, and their securities dominate the local stock and bond indexes.

Moody’s Investors Service cut the credit ratings of all four on Monday, the same day parliament passed a bill to charge them, and Macquarie Bank Ltd., 0.06 percent on liabilities in excess of A$100 billion, from July 1.

The following charts highlight some of the concern swirling around the banks, Australia’s housing bubble fears, and market reaction:

Three of the big four’s share prices are down more than 10 percent this quarter. The downgrades highlight fears that being massively exposed to Australia’s overstretched home-buyers might not be the best of business models.

Some consolation is that the banks’ own capacity to borrow may emerge unscathed. The ratings cuts haven’t halted the steady advance of an index of Aussie financial debt -- and the average yield premium for Aussie bank bonds over government debt has narrowed.

Speaking of being exposed, no one in the world is as overweight local mortgages as Australia’s banks. More than 60 percent of their loan book is in residential property, way above second-placed Norway and more than double the U.S., according to the International Monetary Fund.

And there’s not too much that can be done to change that -- the drop off seen in resources industries means housing is about the only lending game in town.

That’s a potential source of alarm when you look at some of the underlying dynamics. Home prices keep climbing, even as record-low wage growth spurs households to reduce how much they save.

Still, the value of Australia’s housing stock has soared to a record $6.6 trillion, climbing at a greater rate than those home loans that so many are worried about.

Source:
courtesy of BLOOMBERG

by Garfield Clinton Reynolds

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