Australia credit rating stable, pressures remain

by Rebecca Pike22 Sep 2018

Credit pressure remains on Australia’s banks, according to global ratings agency S&P.

This warning comes despite the agency revising its outlook on the Commonwealth of Australia from negative to stable.

The revision reflects the reduced likelihood of one of the downgrade scenarios for the four major Australian banks and Cuscal Ltd. which S&P Global Ratings had previously included.

However it said the pressure remains on government supportiveness for Australian banks. It has kept the outlooks on all four major banks as well as Cuscal and Macquarie Bank Ltd. as negative.

S&P Global Ratings assigned each of the majors a long-term issuer credit rating three notches above their respective stand-alone credit profiles (SACP). This is due to the view that the Australian government is likely to provide timely financial support, if needed, to each of the banks.

The long-term issuer credit ratings on Macquarie Bank and Cuscal are two notches above their respective SACPs, due to the belief these institutions would also be potential recipients of timely financial support from the Australian government, if required.

In the statement S&P Global Ratings said, “A lowering of our sovereign rating on Australia would have resulted in a downgrade of each of the major Australian banks and Cuscal, reflecting the sovereign's diminished capacity to support the institutions in that scenario.

“We now consider this to be a low probability scenario, as reflected in the revision in our outlook on the Australian sovereign to stable from negative.

“Nevertheless, we consider there remains a one-in-three risk of a downgrade of the four major Australian banks, Macquarie Bank, and Cuscal over the next two years because we may revise our assessment of the government's tendency to support systemically important private-sector banks in Australia to supportive from highly supportive during this time.

“This downgrade scenario has already been a part of our negative outlook on the six institutions listed above.”

The group listed likely triggers which would prompt them to review the assessment of government supportiveness:

• Government or regulatory announcements indicating a possible diminution in the government's appetite to support a failing bank;

• Development of a bank resolution framework that envisages statutory bail-in of senior debt;

• Introduction of a total loss absorbing capacity framework; or

• A further shift in global landscape toward a reduction in government support for banking systems.