Property price growth putting banks at risk: S&P

by Miklos Bolza03 Mar 2017

Most Australian banks are facing a one or two notch rating downgrade over the next two years as rising residential property prices put financial institutions at risk.

In a commentary on Australian banks entitled Rising Economic Risks Could Cut Ratings on Most Australian Financial Institutions by One Notch, S&P Global Ratings has examined the dangers of Australia’s hot housing market.

Rising economic imbalances are increasing the risk of a sharp correction in property prices, analysts at the global ratings agency said.

If such a scenario occurs, S&P highlighted eight financial institutions (including six banks) which would incur large credit losses and a subsequent credit rating downgrade.

S&P makes these ratings adjustments by focusing on the Risk Adjusted Capital (RAC) Framework.

“Our risk weights applicable to a bank’s loans are calibrated to the economic risk we see in the country. Consequently, as economic risks in a country rise in our opinion, we increase the risk weights, and that pushes down the capital ratios,” Sharad Jain, director at S&P Global Ratings, told Australian Broker.

“This in turn, could have an additional downward impact on bank ratings. This is because our risk adjusted capital ratios are a key driver of our capital and earnings assessment – which is an analytical factor in our assessment of a bank’s rating.”

In the event of rising economic risks facing banks in a particular country, this by itself would be enough to place pressure on bank ratings within that country, he said.

S&P expects property price growth to moderate and then remain at relatively low levels during the next 12 to 18 months.

However, analysts warned there is a one-in-three chance of a ‘downside scenario’ occurring in which property prices spiked. The resultant rise in risk would weaken the capital ratios of all banks in Australia.

For most banks, this movement would not be enough to put further pressure on their credit profiles. Thus, most financial institutions would only be downgraded by one notch.

However, S&P Global gave a warning about eight Australian financial institutions, highlighting two banks – Auswide Bank and MyState Bank – as being at greatest risk in this ‘downside scenario’.

“It is important to point out that, if our downside scenario materialises, to review our ratings on these institutions, we would make an assessment of their position and plans in relation to capital, business, and broader financial profile,” Jain said.

“A two-notch downgrade would be only one of the three likely outcomes in that scenario. The other two likely outcomes are a one-notch downgrade with stable outlook or a one-notch downgrade with a negative outlook.”

S&P Global also warned about the risks posed for AMP Bank, HSBC Bank Australia, ME Bank and P&N Bank in these circumstances although the agency admitted that parent support from these institutions is highly likely to prevent a two notch downgrade.

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