If you have a mortgage or investment property, you should read this…
National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) shares could come under pressure following a Moody's downgrade.
What's a Moody's downgrade?
Moody's is a credit rating agency which monitors financial risks in investments, businesses and markets, and issues a 'score'. Like your teacher giving you a 'B' on a math exam. Moody's is just one of the agencies, along with Standard & Poor's, Fitch and others.
Yesterday, Moody's downgraded NAB, Westpac, Commbank and ANZ in a report titled, "Moody's takes action on Australian Banks". They downgraded the banks' credit ratings by one notch.
"This change was driven by the rating agency's view that the credit conditions in Australia have deteriorated," Moody's said. "High and rising household debt in the context of low nominal wage growth has led to very high levels of household leverage, thereby increasing the household sector's and, by extension, the banking sector's sensitivity to a potential shock."
What does it all mean, Basel?
If you have a mortgage — or you want one — your debt could get more expensive.
Why?
When banks get their debt from overseas markets, the institutions and people who lend the debt rely on credit ratings to determine their price. The riskier the debt (read: lower credit rating) — the more the lenders demand. So, the banks are forced to pay more money to the lenders.
All that means the banks charge more for mortgages — because they cannot pay for it!
Foolish Takeaway
In addition to rising US interest rates and risks to the financial system, it's likely that the banks will be forced to pass along a higher cost to mortgage holders and property investors.
And with APRA stamping down on risky lending, house prices at eye-watering levels and — the biggest cookie of them all — wages not growing, it's not a recipe for success.
I should mention that Moody's is just one ratings company. They don't have a crystal ball.
However, their rating downgrade follows a similar one by Standard & Poor's.
To my mind, it's plain to see that the banking sector is more fragile than most shareholders realise.
