Global ratings group has found a silver lining in the recession and lockdowns generated by the COVID-19 pandemic – it has made the Australian financial system and the banks, safer.
Seeing Moody’s, Standard and Poor’s and Fitch – the globe’s three biggest credit assessment group – have Australia’s credit rating and that of the banks on a negative outlook, or have cut their ratings (in the chase of Standard and Poor’s), it’s a challengeable view from Moody’s.
But it is also a believable view and one shared by investors who have jumped into bank shares in a big way in the past month, helping drive the wider Australian market higher.
Moody’s points out that Australia’s policy responses to the COVID-19 pandemic has improved financial stability and, in particular, banks’ funding and liquidity positions.
Measures to support the economy during the outbreak have included stimulus for households and businesses, and government bond purchases by the Reserve Bank of Australia to target the three-year bond rate at 0.25%.
“The government’s policy response will help ensure investor confidence in banks in Australia, which is crucial for the biggest banks that rely on global wholesale credit markets for their funding requirements,” Frank Mirenzi, a Moody’s vice president and senior credit officer said in a note on Thursday.
Banks’ net funding gap has been helped since 2008, with significant increases in deposits. The banks have also improved their term structures, reducing their reliance on short-term market funding.
However, Australia’s largest banks – Australia and New Zealand Banking Group Limited– still have large market funding requirements. They issued $108 billion of debt securities in aggregate in their respective 2019 fiscal years.
Moody’s said policy support measures to date have spurred monthly growth in deposits in the banking system of 5.2% in March and 2.4% in April, compared to the 0.8% cent monthly average for the 12 months to March 2020.
Those rises in March and April are in contrast to the reports os big withdrawals of cash in February by worried depositors as the COVID-pandemic loomed.
It would seem that once they regained confidence, they redeposited those funds back into the banks, or sought to direct incoming funds to their bank accounts.
“This significant deposit growth has lowered banks’ risk of short-term liquidity constraints, with short-term bank securities outstanding declining to $16.7 billion from $20.1 billion over the first quarter of 2020 and likely to continue declining over the next six months,” Moody’s said.
“Meanwhile, wholesale debt issuance will likely decrease substantially in the second half of calendar 2020. While business credit growth accelerated in March 2020 as companies drew down committed credit lines, personal credit is likely to decrease further while housing loan growth is likely to slow”.
“Finally, the RBA’s term funding facility, introduced in April to give banks access to three-year funding at a fixed rate of 0.25 percent, will cover banks’ refinancing needs over the next six months and reduce their need to resort to wholesale market funding. As of 3 June 2020, banks had taken only AUD6.3 billion through this facility, out of a total of AUD135 billion,” Moody’s pointed out.
Despite this optimism, investors were not listening in yesterday’s huge sell-off. the ASX 200 tumbled 3.05% or more than 187 points in a major reminder that all is not up in a COVID-19 world.
Bank shares led the slump – Commonwealth Bank shares lost $4.4% to end at $68.46 and cut the gain in the past month to just over 16%; Westpac shares slid 6% to close at $18.50 and trimmed the month’s rise to a still told 23.7%.
ANZ shares also fell 6.2% to $19.47, cutting the month’s gain to 28.5% and the NAB’s shares fell 5.4% to close at $19.07 to cut the past month’s gain to 25%.