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Risk and demand trends prompt Genworth downgrade

Moody’s has downgraded Genworth Australia from A3 to Baa1, reflecting rising risks in the Australian housing market and reduced demand for domestic lenders’ mortgage insurance (LMI).

The ratings agency says these factors outweigh positive developments such as the de-risking of Genworth’s portfolio and its stable regulatory capital.

“Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness,” Moody’s says.

Low wage growth and rising underemployment have hit households’ capacity to service debts.

The rise in house prices over the past four years, along with growth in home investment and interest-only mortgages, has also raised concerns about financial stability.

Australia’s ratio of household debt to disposable income increased to 188.7% at the end of last year.

Regulatory measures introduced in 2015 caused a decline in higher loan-to-value ratio mortgages, which are the most likely to be insured.

This led to a sharp fall in gross written premium for Australian LMI providers, with Genworth Australia reporting a 25% drop in financial year 2016 and a 20% decline the previous year.

Genworth has responded to the downgrade, noting both Fitch and S&P affirmed its financial strength and saying it has a strong, stable balance sheet with a highly rated cash and fixed-interest-rate portfolio of $3.5 billion. It says it remains strongly capitalised.

Moody’s says it expects Genworth to maintain its stable Baa1 rating, despite elevated risks in the housing market and the potential for further erosion of the customer base.

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