Increased private sector debt and higher residential property prices have led S&P to cut the ratings on over twenty Australian banks and building societies. The one notch downgrade is the result of what S&P described as “an increased risk of a sharp correction in property prices” after years of debt-fueled property investment. S&P says if such a price drop were to occur, “all financial institutions operating in Australia are likely to incur significantly greater credit losses than at present.”
The ratings downgrades have been largely restricted to financial institutions outside of the four major banks and Macquarie, although these banks remain on “negative outlook”. The rationale is the major banks can expect “timely financial support” from the Australian government should it be required, whereas other banks may not be deemed important enough to save should loan losses wipe out their capital.
Not all banks outside the majors and Macquarie were downgraded. S&P says the parent companies of Suncorp-Metway and QT Mutual Bank Ltd would be likely to provide support, as would the parent companies of a swag of foreign-owned banks such as ING Bank, Citigroup and HSBC.
While S&P thinks potential problems arising from the Australian property market are worth a downgrade, it also thinks Australian financial institutions operating in the mortgage market face conditions which are “relatively benign by global standards.” S&P thinks recent actions by APRA should assist an orderly unwinding of high levels of debt as it forecasts property price growth to slow or for prices to fall mildly. S&P points to previous cycles in Australia in which this has occurred without any significant losses.
Lower ratings will increase the banks’ cost of funding and early estimates of the cost increases range from 5bps to 15bps per annum. These higher costs will not immediately feed through as banks raise funds over time and it is only the cost of each new dollar which will be affected. However, whatever advantage was granted by the Federal Government’s 6bps bank levy is set to disappear.
