Moody's negative on NAB

Moody's has shifted its outlook from stable to negative and says the bank is facing "challenges not universally shared by its major Australian bank peers".

While the bank's rating remained unchanged at Aa1, the outlook signifies the agency's expectations for the coming 12to 18 months.

"The negative outlook reflects both the potential impact of weaker credit conditions in NAB's core geographies, as well as ongoing dislocations in credit markets," said Moody's senior vice-president Patrick Winsbury.

The outlook downgrade followed the bank's decision to set aside $830 million for its exposure to assets related to the collapsing US housing market, bringing its total provision to more than $1 billion.

The bank said the provision showed it was taking a conservative approach to the debts, effectively valuing them at zero.

In a statement following the downgrade, NAB said it was seeking to restore its outlook to stable. "NAB remains committed to underpinning conservative balance sheet settings," the bank said.

Moody's cited several factors that put NAB at a particular risk relative to other major Australian banks as global conditions worsened. Among them were its profitability and capital structure, business banking exposure, and its exposure to weakening British and US markets.

Part of the company's US exposure comes through last November's acquisition of the South Dakota-based Great Western Bank; while in Britain, NAB owns the Scotland-based Clydesdale Bank.

Despite the downgrade, Moody's said the bank's credit profile remained strong. "The bank retains considerable flexibility to address some key challenges arising from weaker market conditions," the agency said.

Moody's outlook downgrade brings it into line with fellow ratings agency Standard & Poor's, which during the week also shifted its outlook from stable to negative.

S&P has kept Australia's four major banks - NAB, ANZ, Commonwealth and Westpac -on a AA rating, a level topped by few commercial banks around the world.

This is the first time Moody's has shifted the outlook for any of the four major banks away from stable since the current scheme was introduced in 2003.

The rating offered by the agencies signifies the level of risk attached to an organisation and influences borrowing costs.

A banking analyst, who did not want to be named, said the shift in outlook by the two agencies was "a bit of a knee-jerk reaction", in part stemming from a lack of confidence in the agencies after recent defaults on debts given a low-risk rating.

NAB shares fell 36 yesterday to $24.34, bringing the fall since last week's downgrade to 20.7%.

KEY POINTS

- Ratings agency changes its outlook from stable to negative.

- NAB faces challenges "not universally shared by its major Australian bank peers".