Risk of "sharp correction" prompts credit ratings downgrade

by AB23 May 2017

Standard and Poor (S&P) Global Ratings has lowered the credit ratings for the vast majority of financial institutions in Australia, citing concerns over increased economic risks due to a rapid rise in private sector debt and skyrocketing house prices in Sydney and Melbourne.

Some of the banks affected by the downgrade include AMP, Bank of Queensland, Bendigo and Adelaide Bank, Australian Central Credit Union, Auswide Bank, Community CPS Australia, Liberty Financial and MyState Bank. The long-term issuer credit ratings for the major four banks remain unchanged, reflecting the agency's expectation that they would receive financial support from the government if necessary.

The credit ratings agency said the continued build-up of economic imbalances in the country over the past few years had exposed financial institutions to greater economic risks and could result in a "sharp correction in property prices". The agency said if that were to occur, all banks would be likely "to incur significantly greater credit losses than at present."

"With residential home loans securing about two-thirds of banks' lending assets, the impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its persistent current account deficits and high level of external debt," the statement from S&P said, according to the Australian Financial Review.

The AFR reported that AMP had been cut from A+ with a negative outlook to A with a stable outlook; Bank of Queensland had been cut from A- with a negative outlook to BBB+ with a stable outlook; and Bendigo and Adelaide Bank had also been cut from A- with a negative outlook to BBB+ with a stable outlook.

According to the statement, S&P noted that despite its view that the risk of a downside scenario and its impact had increased, it still considered the outlook for Australian banks as relatively benign by global standards.

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