Ratings agency Moody’s Investors Service has downgraded to negative the ratings outlook for ANZ Banking Group Ltd, Commonwealth Bank of Australia Ltd and Westpac Banking Corporation because of the potential impact of the economic downturn.

That means Moody’s is more likely to cut the banks’ financial strength ratings of single-B, and long-term deposit and debt ratings of Aa1 over the medium term.

“The negative outlook reflects the potential for the deepening global economic downturn to have a protracted impact on the banks’ asset quality and earnings,” Moody’s senior vice president in Sydney Patrick Winsbury said in a statement on Monday.

The three banks remained solidly within Moody’s Aa debt rating band while the government guaranteed obligations remained Aaa rated with a stable outlook.

“All three banks continue to have strong credit profiles and benefit from a very high level of support from the Australian government,” Mr Winsbury said.

“Consequently, even in a severe downside scenario we would expect Australia’s major banks to remain solidly positioned within the Aa rating band.”

Moody’s had already revised National Australia Bank Ltd’s rating to negative last August.

Moody’s said the banks had all reported increased asset impairment, and the ratings agency is forecasting the Australian economy to enter a recession this year.

All four of Australia’s big banks had exposure to the relatively more stressed New Zealand economy.

However, Moody’s said the big four were better placed than other banks in the world because the recession was unlikely to be as deep nor long as other industrialised economies, the banks didn’t have a large exposure to “toxic assets” and corporate debt was well contained.

Moody’s said two notches of its Aa1 rating of the four banks came from the support of Australia’s banking system provided by the government and Reserve Bank of Australia.

AAP